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What Warren Buffett wants you to know
How do you learn from a master? Start by listening to what he has to say.
May 3, 2004: 2:58 PM EDT
By Jason Zweig, MONEY magazine

OMAHA (CNN/Money) - Editor's note: The Berkshire Hathaway annual meeting attracted nearly 20,000 attendees this past weekend. With elements of an investing seminar, a revival meeting and a carnival, the event has become a ritual.

MONEY magazine's Jason Zweig covered the meeting for CNN/Money. He culled the following highlights out of lengthy Q&A sessions between Berkshire shareholders and Warren Buffett & Charles Munger, the firm's top managers.

Because audio and video recording was prohibited, what follows is not necessarily a verbatim transcript of their responses. It is, however, a close approximation based on Zweig's manual transcription of the multi-hour sessions.

Calpers pressure

The first question from the floor asked whether, under pressure from institutional investors like the California Public Employees Retirement System, Buffett was considering stepping down from the board of Coca-Cola. "Whoever suggests that," shot back Buffett, "should do 500 situps."

"I think it was Bertrand Russell who said most men would rather die than think," he said. "We have $10 billion [BRK's stake in KO] riding on that side of the table. I encourage institutional shareholders to behave like owners, but I also encourage them to think logically as owners should in determing what causes they should take on."

Munger, as usual, was more succinct: "The cause of reform is hurt, not helped, when an activist makes an idiotic suggestion."

Executive compensation

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Buffett and Munger both were scathing on the subject of executive compensation and the process of how pay is set at major corporations:

"The typical large company has a compensation committee," said Buffett. "They don't look for Dobermans on that committee, they look for chihuahuas."

He paused amid laughter, then added: "Chihuahuas that have been sedated."

Munger interjected: "I would rather throw a viper down my shirtfront than hire a compensation consultant."

On Bill Gates and succession

From the floor, a shareholder wanted to know if Buffett would consider asking Bill Gates to succeed him as Berkshire chairman. With a laugh, Buffett asked: "Did Bill put you up to this?"

He added: "Bill could do my job very well, although I couldn't do his! But we've got four people who could do my job maybe better than I can. We're well equipped."

After a pause, Buffett added: "I don't think [Gates] is really looking for my job, although he may salivate at the pay level." (Buffett's cash compensation was $100,000 in 2003.)

On stock options

Already up on the soapbox, Buffett and Munger went straight into a denunciation of everyone who opposes treating stock options as an expense. To Berkshire's bosses, it is not just a technical accounting question, but a matter of fundamental morality.

"Write your congresspeople giving them your views on whether options should be expensed," said Buffett. "It was a disgrace 10 years ago when Congress bludgeoned the SEC and the [Financial] Accounting Standards Board to override FASB's decision to expense options. It accelerated the anything-goes mentality of the 1990s."

Buffett then told the crowd a story about a 19th-century bill in the state of Indiana that sought to "change" the value of pi.

"It seems there was a fellow who discovered some new relationship between circumference and diameter that would help students learn a better kind of geometry, so he wrote a law to change the value of pi from 3.14159 etc. to 3.20. It passed the Indiana house -- until the Indiana senate finally thought better of it."

After the audience stopped laughing, Buffett came to his point about options, "The U.S. Senate concluded that the world was flat, because their their contributors paid them enough to say the world was flat."

Then Munger weighed in: "It's worse than that. Those people who wanted to round pi to 3.2 were stupid. These people [the opponents of expensing options] are worse than stupid. They know it's wrong and want to do it anyway."

Worst mistake

When a shareholder asked for Buffett's worst mistake in recent years, he answered: Wal-Mart.

"I set out to buy $100 million shares of Wal-Mart at a [pre-split price of] $23," recalled Buffett. "We bought a little and it moved up a little and I thought maybe it will come back a bit. That thumbsucking has cost us in the current area of $10 billion."

Mutual funds

Buffett and Munger reserved some of their most withering scorn for the mutual fund industry.

When a shareholder asked how they would recommend selecting a professional investment manager, Berkshire's boss opened the bomb bays: "One thing I can almost guarantee you is that the promotional types are very unlikely to meet any long-term tests of ability and sometimes integrity."

Then Munger weighed in: "Mutual funds took bribes for the proposition of betraying their shareholders. It was like someone coming to you and saying, "Why don't I kill your mother and we'll split the insurance money?"

Dividends

A shareholder asked what it would take for Berkshire to change its longstanding opposition to paying a dividend or conducting share repurchases. Buffett used the question to teach a mini-clinic on corporate finance, pointing out that the managers of a company have a fiduciary duty to put the company's cash to optimal use.

"When a stock can be bought well below its business value, that is probably the best use of cash," he said. "Stock repurchases have become very popular now, but I think it's often done by people who are hoping it will cause their stock price not to go down."

The implication: Companies that buy back their stock merely to counteract the dilution caused by the exercise of stock options by insiders are misusing the shareholders' assets.

Later, Buffett made a striking observation. Imagine that Berkshire decided that it could no longer wisely invest its $30 billion-plus worth of cash and decided to distribute all that cash to shareholders in a special dividend. Buffett himself, as the largest shareholder, would get more than $7 billion.

Then, he pointed out, he would have to try to find good investment opportunities to put all that money to work for his own account. "I would be in competition with Berkshire's shareholders, and I don't think that would be good for them," Buffett said.

On Google

Buffett and Munger had high praise for Google. Not only is Buffett an enthusiastic user of the search engine, but he and Munger admire the style of Google bosses Larry Page and Sergey Brin.

"I'm very pleased that the Google fellas decided that it's a good idea to talk to their prospective owners in a very straightforward manner"

"I think you'll know what they will do and won't do," said Buffett, in discussing Google's prospectus. "More companies ought to do that."

As Munger put it, "Those two guys are two of the smartest young men in the country, and it's much better to be copied by people that smart."

Later, Buffett indicated that Page and Brin -- through a mutual friend -- had e-mailed an advance copy of the document to Buffett to make sure it was "OK with me."

Buffett's reply: "I said it was fine, although I thought a royalty was appropriate."

Whole foods

Don't look for Berkshire to buy a stake in Whole Foods any time soon.

When a Berkshire shareholder from the Bay Area asked if Buffett and Munger had ever considered investing in Whole Foods, Munger barked: "My idea of a good place to shop is Costco [where Munger is a director]. Costco has these heavily marbled steaks and the idea of eating some whole-grain whatever and washing it down with some carrot juice has never appealed to me."

Troubled times

When a shareholder asked whether Buffett and Munger were worried by the big picture -- the war in Iraq, higher interest rates and such -- Buffett had a ready answer:

"At any given point in history, including when stocks were at their cheapest, you could find an equally impressive number of negative factors. In 1974 you could have written down all sorts of things that could have led you to think the future would be terrible," he said.

"We really don't pay any attention to that sort of thing," he added. "Our underlying premise is that this country will do very well, and it will do very well for businesses."

In euphoric times like 1999, Buffett explained, people invest as if they are "living in a fool's paradise" and end up losing money on stocks even though business as a whole remains profitable. "American business really has never let investors down," he said. "But investors have done themselves in quite frequently."

On life

As always, many of the questions from shareholders had little to do with investing. A 14-year-old from California, Justin Fong, asked what advice Buffett and Munger would give a young person on how to be successful.

"It's better to hang out with people better than you," said Buffett. "Pick out associates whose behavior is better than yours and you'll drift in that direction."

Added Munger drily, "If this gives you a little temporary unpopularity with your peer group, the hell with 'em."

Press conference

At a Sunday press conference, Buffett and Munger held forth for another two-and-a-half hours in front of roughly 50 journalists from as far away as Australia and South Korea.

After talking almost non-stop for two entire days, Buffett's voice was beginning to wear thin, but he and Munger had lost none of their Abbott and Costello routine. Buffett played the clever smoothie who speaks in paragraphs and Munger assumed the role of a taciturn cynic whose favorite words are "stupid," "crazy," "bonkers" and "nuts."

When a TV reporter asked if Buffett and Munger had a favorite -- or least favorite -- industry sector, Buffett expatiated patiently on their method of picking securities: "We don't say, 'We like this industry and therefore we'll try to buy a stock in it.'"

When Buffett paused for breath, Munger drawled: "Warren, isn't it fair to say that if we did have an opinion, we wouldn't tell him?"

"Yes," said Buffett, "but we don't have an opinion." Turning the reporter, Buffett delivered the coup de grace: "So you lose twice."

A roomful of journalists could not resist asking about the prospects for newspaper stocks. Buffett and Munger were surprisingly bearish on newspapers, a major investment for Berkshire through its large stake in the Washington Post Co. and its outright ownership of the Buffalo News.

After saying that he and Munger are "newspaper addicts" and that "it's still an unusually good business," Buffett struck a somber note.

"The economics of newspapers are very, very close to certain to deteriorate over the next 10-20 years," he warned. "I see nothing that will turn around the erosion from both the circulation and advertising standpoints."

As a personal aside, Buffett reported that "if I couldn't have done what I do now, I would have enjoyed being a financial journalist."

The thought was simultaneously flattering and humbling to every reporter in the room.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.