Berkshire Hathaway 2013 Annual Meeting Transcript

Transcript of the 2013 Berkshire Hathaway Annual Meeting held on May 4, 2013 on Omaha, Nebraska:

(Click here to skip to the Q&A section)

(To see the full transcripts of all Berkshire Hathaway Annual Meetings on record, click here)

Appreciation for Brad Underwood and Carrie Sova

Warren Buffett:

Good morning.

I’m a little worn out.

We’re going to… well, first of all, I really want to thank Brad Underwood. He puts the movie together every year, does a terrific job.

Andy Heyward and Amy are responsible for the cartoon. They also produce “The Secret Millionaire’s Club,” which has been a huge hit this year, and I really want to thank them for their part in this, too.

And finally, Carrie Sova who… who puts this whole affair together, she’s four months pregnant.

She got her MBA, I think, yesterday or… and, in addition, she is the ringmaster for all of this.

Let’s give Carrie a terrific hand.

We’ll go through a few figures, few slides. I’ll introduce the directors and make one or two more announcements, and then we’ll get on to the questions.

Berkshire’s first quarter earnings

Warren Buffett:

Now, if we could put up the first slide, which is the earnings that were released yesterday. And as you can see, it was a good quarter.

It wasn’t quite as a good a quarter as it looks, which I’ll explain in a second. But really all of our businesses did very well.

You should focus on operating earnings. Charlie’s getting a head start here on the peanut brittle and fudge, so I’ll catch up later.

It was a very good… it was a benign quarter in insurance, but our other businesses, particularly our big businesses, did quite well, and I don’t remember whether we’ve ever had operating earnings of more than 3 point… almost 8 billion. But, in any event, it was quite satisfactory.

Now, we’ll put up slide two. The insurance earnings were helped a bit. They were still terrific without these factors, but they were helped a bit by the fact that the dollar was strong, and that reduces the liabilities we have on outstanding in foreign currencies.

So if we have losses we’re going to pay in the future and they’re payable in pounds or euros and the dollar appreciates against those currencies, we get a small benefit from that.

We also have it… it hurts us in other ways. We have so many different kinds of businesses, and then we own other earnings through Coca-Cola that operate around the world, that I really never know whether when the dollar goes up or down, whether it helps us or not.

So I’ve never been able to figure it out. So we just sort of take it as it comes. And we do want to explain that to you, the insurance earnings.

And then we had another item, which is kind of interesting. We’ve had a disagreement with Swiss Re about a life reinsurance contract, and that’s… the disagreement’s probably lasted for well over a year, and that was settled in the first quarter.

And as you can see, we showed a gain of 255 million pretax from settling this disagreement, but, interestingly, Swiss Re showed a gain of 100 million also from settling the disagreement.

So, we are working on an arrangement with Swiss Re whether we’ll get in an argument every quarter , and both report higher earnings when we settle it.

It’s magnificent what accounting can do.

One real high point of the first quarter was the pickup which I noticed… which I noted… in the annual report, about the gain in both the closure rate and the persistency rate at GEICO. These are hugely important factors.

And if we’ll put up the chart showing the gain of GEICO’s auto policies, the strengths I mentioned in 2012, and not only continued in 2013, but the trend has become even stronger.

And there’s a lot of seasonal to policy gains. But as you can see, month by month, our gains have… and policies have very significantly improved over 2012.

And, again, it’s because our closure ratio, in other words, the number of people that get a quote from us and then go on to buy a policy, that rate has improved very significantly this year, and with it we also had a gain in persistency, the people that renew the policies with us, and that’s pure gold.

A policy has a mathematical value to us of at least $1,500, so if we had a million policies in a year… and I’m hopeful we might do that this year… that’s a billion-and-a-half of value that gets built into our intrinsic value, which does not show up on the income statement or balance sheet at all, but it does increase the value of GEICO versus what we carry it for.

And I can’t resist a little sales pitch on that because this closure rate, which, like I say, is at incredible levels, means that when people go to our website or call us and get a quote, they find that they can save a lot of money.

I mean, people love our little gecko, but they buy the policies because we save them money.

And it just so happens that in the auditorium right near here, the exposition hall, we have a lot of very friendly people that will help you save money, too.

So I urge you… you can walk out anytime Charlie is talking and go and get a quote, and a very high percentage of you could save money by doing that.

And, you know, that is in the Berkshire spirit, to save money at every opportunity. So I’m hoping you will check that out, and we will set a record for policies sold.

And, finally, our railroad, this year, is doing very well. You saw the earnings in the first quarter report, if you’ve had a chance to look at that.

And we’ve got some figures up that show our gain in car loadings in the first 17 weeks. It’s been
3.8percent, whereas the other four major Class I railroads in the United States have had a gain of four-tenths of a percent.

That’s significant money that… and we don’t have the Canadian railroads here that operate in the United States. They both come down, the Canadian National, Canadian Pacific. But… but this is representative of what’s been happening.

We’ve been helped by the fact that, fortunately, a lot of oil has been found very, very close to our railroad tracks, and what better place to find oil?

And so we’ve been moving a lot of that, and it’s worth… and we’ll be moving a lot more the way things are going.

And the result of all this… we now will put up the next slide… we’re now the fifth most valuable company in the world.

And that will change over time, but I hope it changes for the better.

Warren introduces Berkshire’s board of directors

Warren Buffett:

I’d like… the business part of this meeting starts at around 3:30, and at that time we’ll have the election of directors.

But I would like, nevertheless, for those of you who won’t stick around to the bitter end, I would like to introduce our directors, and… Charlie and I are directors.

And if our directors would stand and remain standing when I call your name. And no matter how strong the urge, withhold your applause until they’re all finished standing, and then you can withhold your applause then if you wish, too, but I plan to applaud. OK.

Howard Buffett. Steve Burke. Susan Decker.

So just stand and remain standing… there we are. OK.

Bill Gates. Sandy Gottesman. Charlotte Guyman. Don Keough. Tom Murphy. Ron Olson. Walter Scott, Jr.

And our soon to be new member, Meryl Witmer.

OK. No more withholding.

First announcement – Ariel Hsing will be available to play table tennis at Borsheims tomorrow

Warren Buffett:

Now, we’ll start the questioning in just one minute, but there were one or two announcements to make.

We did not put it in the… we did not put it in the annual report because we hadn’t firmed it up yet, but tomorrow at Borsheims, our friend Ariel Hsing will be available to play table tennis with any of you foolish enough to challenge her.

I met Ariel when she was nine, and she became the youngest women’s table tennis champion of the United States, and then last summer she went on to the Olympics.

And at the Olympics, she won her first two matches, and she won more games off the woman that became the eventual Olympic champion than any other participant in that event.

So Ariel will be out there tomorrow at 1 o’clock. And if you’re courageous, you’ll show up with your paddle and end up looking like an idiot.

Second announcement – Stan Lipsey of the Buffalo News retires

Warren Buffett:

One more introduction, I don’t know whether we can get a spotlight on him or not, but Stan Lipsey retired this year as publisher of The Buffalo News.

And, as Charlie can attest, as well as I, back in 1978, ’79, ’80, we had an enormous business problem in the Buffalo News. We were locked in a competitive struggle. And we were not doing well, in part, because of we were operating under a tough judicial order for a while until it got reversed on appeal.

And Stan gave up a wonderful life here in Omaha and asked no questions and for no pay came up to Buffalo, and The Buffalo News would not have turned out to be the paper that it’s turned out to be or produced the profits that have been produced for Berkshire, without Stan Lipsey.
So, if Stan could stand, let’s give him a hand. Stan the Man.

Third announcement – Berkshire bought the remaining 20 percent stakes of ISCAR

Warren Buffett:

One other announcement, then we’ll go to the questions.

It was announced a couple of days ago that we bought out the final 20 percent of ISCAR held by the family for about $2 billion. It’s a transaction they’re happy with, we’re happy with.

As a matter of fact, if you saw Eitan Wertheimer dancing at “Dancing with the Stars” there, you could have seen how happy he was.

So we will now own 100 percent of ISCAR, but our relationship with the Wertheimer family will continue.

It’s been a sheer joy. The business has done terrifically. The people have behaved magnificently, and ISCAR will be part of Berkshire forever. So I want to thank Eitan and his family.

And, Eitan, are you here? Can you stand up, and your family? Thank you.

Let’s have a light here in the front row. OK.

Q&A Guidelines

Warren Buffett:

OK. We’ll now move on to our questions. We’ll continue these until about noon. We’ll take an hour break for lunch. We’ll come back, and then we’ll continue until about 3:30, at which time we will convene the business meeting.

And we will start off… we have three journalists who have been here before on the right, and we have a distinguished panel on the left, including a short seller, perhaps the first at any annual meeting, and we will start off with Carol Loomis.

Q&A – Morning Session

(Click on a link below to skip to a particular topic)

1. Berkshire’s 5-year performance is on track to trail the S&P for the first time.
2. The competitive advantages of ISCAR and its competitor Sandvik.
3. The keys to keeping Berkshire as it is after Warren is gone.
4. Warren talks about the partnership deal with 3G Capital to acquire Heinz.
5. The recent actions of Ajit Jain to help Berkshire acquire a broader share of the insurance market.
6. Why GEICO is not adapting technology like what some of its competitors are doing.
7. The key to disclosure is accuracy and simultaneity.
8. Berkshire will not do as well as it has in the past and size is a factor.
9. What will happen if the US dollar loses its status as the world’s reserve currency?
10. Corporate profits as a percentage of GDP are at an all time high.
11. Warren thinks his successor “will probably organize things a little differently” at Berkshire.
12. The long term risks of the Fed stimulus.
13. How has the zero-interest rate policy of the Fed affected Berkshire?
14. It’s better to build than buy in the commercial insurance business.
15. What Warren and Charlie thinks about unregulated digital currencies like bitcoin.
16. Warren defends the Pampered Chef’s operations against accusations that it is a pyramid scheme.
17. How Warren’s successor will be able to succeed.
18. Berkshire haven’t bought anything from unwilling sellers.
19. Berkshire’s long-term sustainable competitive advantage.
20. How declining demand for trains to carry coal and oil would affect BNSF.
21. Warren: “It will be a sad day when the Harley-Davidson notes mature”.
22. Todd Combs and Ted Weschler has free reign to invest as they please except for a few minor restrictions.
23. Warren doesn’t think Progressive’s selection process is better than GEICO’s.
24. How Warren and Charlie live and operate.
25. Why Warren bought the Omaha World-Herald.
26. Would Warren consider breaking up Berkshire to make it easier to manage for his successors?
27. High health care costs will be a major problem for America’s competitiveness.
28. How the Affordable Healthcare Act is going to affect Berkshire. To learn more about the Affordable Healthcare Act, click here.
29. How the ongoing trend of customers installing rooftop solar panels in their house would affect Berkshire’s utility business.
30. How luck and timing contributed to Warren’s success as an investor.
31. Warren and Charlie shares an important advice on how to live life.
32. Insurance should be conducted as a rational activity.
33. You can’t afford to go along with the crowd in investment or insurance.
34. Warren sees gender inequality as a problem and shares his thoughts on it.
35. Is Berkshire “too big to fail”?

An update on Warren’s bet against hedge funds

Warren Buffett:

We’re now very close to noon.

I promised… five years ago… I wrote about five or six years ago about the inordinate costs that investors bear in… many investors bear in—getting sold various types of products.

And I talked about hedge funds and private equity and all kinds… and a whole variety of things.

The investment world has been very good at extracting a very significant percentage of the returns that investors get for themselves.

So I offered to bet anyone that wanted to step up to the plate that a group of hedge funds would not beat an unmanaged no-load index over a ten-year period.

And I promised… and then I got a taker, a very nice group of people. I like them. Ted Seides is in the group.

So they took me up on this. So we each put about $350,000 or so into something where in ten years… well, we put it in zero-coupon Treasuries, which would mature and be worth a million dollars in ten years.

And I promised to report on the bet every year.

And what we did this year, interest rates fell so far that our original 700,000 or so investment got to be worth like 950,000 just because the five-year Treasury got so low. So there was very little appreciation left into it between now and five years from now when it matures.

So, we sold the zero-coupon Treasuries and we bought Berkshire with the proceeds, and I guaranteed that it would be worth a million dollars. Currently it’s worth about a million-two, so that the charities are benefiting to some extent.

Now, Ted has one charity, which is a very worthwhile charity. I have Girls Inc. of Omaha, which is a charity I selected.

And we’ll put the… we can put the figures up on the… there as to where we stand at the moment.

The hedge funds got off to a fast start, and were 13 points ahead of the index fund at the end of the first year.

But the last four years… and these are funds of funds, so they really represent probably 2 or 300, maybe, hedge funds underneath.

But there’s two levels of fees involved. There’s the standard fees of the hedge funds, which probably many times are “2 and 20,“ but can be other things, and then there’s the fee of the fund of funds on top of it.

So, we now are at the halfway point, and I’ll keep reporting to you every year how we do. And if Berkshire does well, we’ll have well over a million dollars to distribute to one of two charities.

You might enjoy going to a website called longbets.org. That’s where… they’re the people that hold the money.

And you will see that there are a number of propositions that people have wagered on, and the proponents and the opponent of every proposition give a short little description. Ted gave a description of why he thought he’d win. I gave a description of why I thought I’d win.

But some of these are… I just can’t resist a couple of… pointing out a couple of them. You can see these on the web.

But one of it is that a large collider will destroy the Earth in 10 years. Now there’s a $1,000 bet on that, but I’m not sure who will collect.

I thought that was an interesting one. And there was one other, and then we’ll go to lunch. But there are a number of these that are quite interesting.

At least one human alive in the year 2000 will still be alive in 2150. Now, that’s 148 years from when the bet was entered, there’s a $2,000 bet on that.

And I hope Charlie is in contention for the… being the winner of that one.

Q&A – Afternoon Session

(Click on a link below to skip to a particular topic)

1. Warren assures everyone he is still passionate about investing.
2. Evaluate a business by its entirety, not just by its financials.
3. Warren and Charlie have never made an investment decision based on a macro economic forecast.
4. What Fruit of the Loom can do to protect itself against a low cost competitor like Gildan.
5. Warren’s and Charlie’s early investment portfolios and the books that influenced them.
6. The airlines industry is a “labor-intensive, capital-intensive, largely commodity-type business”.
7. Book value has a reasonable tracking utility in valuing Berkshire.
8. Charlie won’t be moving to Omaha.
9. Warren doesn’t think climate change will affect the year to year assessment of insurance rates.
10. Warren and Charlie refuse to engage in any short-selling activity.
11. How Warren and Charlie determine the fair price to pay for an acquisition.
12. The ten greatest words of economic thought in history.
13. Why Benjamin Moore continue to adhere to a dealer system.
14. Which is better: invest in an index fund or choose the five best stocks and put a lot of money into them?
15. Will the selling of Berkshire shares to fund Warren’s philanthropy hurt its stock price?
16. Most of Berkshire’s opportunities will be in the United States.
17. Warren and Charlie’s advice to a young money manager on how to attract investments.
18. Is Ajit Jain Warren’s successor?
19. Howard Buffett’s future role as non-executive chairman of Berkshire.
20. People who have stayed in cash, cash equivalents or short-term treasuries are hurt by the low interest rates.
21. The competitive moat of IBM.
22. What Warren and Charlie would do if they are investing small amounts of money.
23. The thing to do in investing is just find a good business at an attractive price and buy it.
24. Warren doesn’t think there’s another housing bubble developing.
25. Warren is perfectly willing to look at business opportunities in Europe despite its debt problems.
26. How social media has affected Berkshire’s businesses.
27. How Warren and Charlie was able to detect frauds.
28. Warren is open to the idea of investing in sub-Saharan Africa.
29. More kids are ruined by the behavior of their parents than by the amount of the inheritance.
30. Will the board of directors consider splitting Berkshire’s A-shares?

End of Q&A

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