SPEC IAL RE PORT

REPORT

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BERKSHIRE HATHAWAY AN NUAL GENER AL MEETING 2004:

SPECIAL REPORT—BERKSHIRE HATHAWAY AGM 2004

The Buffett and Munger Show

A LETT ER FROM YOUR RESE ARCH DIRE CTOR

Dear Subscriber,
expense) to fly halfway
Some may say that it’s an odd bunch of blokes who take the time (and
I wouldn’t argue with that.
around the world just to hear a few hours of discussion on investing.
s, which is why three of
But our research team isn’t just a motley collection of ordinary analyst
happily bypassing all the
us trekked first to Omaha, Nebraska and then to Pasadena, California,
traditional tourist traps along the way.
company you may have
Omaha happens to house the head office of Berkshire Hathaway, a
ny meeting, after reading
heard of. If you’re perplexed as to why we travelled so far for a compa
, you may even find yourself
this report I suspect your puzzlement will have eased. Indeed
contemplating joining us next year.
Munger, who also
Warren Buffett—known as the Sage of Omaha—and his partner Charlie
Hathaw Had you invested
ay.
heads Wesco, located in Pasadena, run a company called Berkshire
40 years, Berkshire has
$10,000 in 1965, it would now be worth around $50m. Over the past
so you can understand
delivered shareholders an average annual return of more than 22%,
prominently. The
why, in our Analysts’ Profiles, the names of Buffett and Munger feature
g of Wesco Financial
Saturday Berkshire meeting is followed on the Wednesday by the meetin
Omaha to Los Angeles (except
(80.1% owned by Berkshire) so we trod the well-worn path from
patch instead).
for Tom Elder, our resources analyst, who headed for the Texas oil
with Berkshire Hathaway
This is a report on that trip, and a little more. If you’re not familiar
ction to them. You’ll then
and the characters who run it, what ensues will be a great introdu
two meetings. And finally, it
learn what we consider to be the pearls of wisdom disclosed at the
on the subject (for the
will be an ideal jumping-off point for those interested in further reading
sad cases who, like us, just can’t get enough of Buffett and Munger).
Berkshire one, which
Personally, I found the Wesco meeting even more enjoyable than the
nce was most enlightening,
may come through in our report on page 6. But the overall experie
follow. It’s a cliché, I know,
something I hope we’ve managed to communicate in the pages that
enjoyed
but I dearly hope you enjoy reading this report half as much as we’ve
putting it together.
C ON TE N TS
Yours sincerely
PAGE

A museum for great businesses 2

Buffett’s circle of competence 2
Greg Hoffman Berkshire Hathaway’s approach 3
re Hathaway. Woodstock for capitalists 4
Interests associated with The Intelligent Investor own shares in Berkshi
Wesco Financial meeting 6
Further reading and research 8
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Special CReport
A museum for great businesses
Berkshire Hathaway was once a textile company that News, the fractional jet ownership business Net Jets, the
struggled to pay its staff wages. Now it could buy our world’s largest carpet manufacturer, Shaw Carpets and
two biggest banks and still have $10bn in the kitty. utility business MidAmerican Energy.
Less understood has been Berkshire’s investments and
When Warren Buffett first started purchasing shares natural growth in the insurance and reinsurance
in Berkshire Hathaway in 1962, it was a struggling New businesses. GEICO, one of America’s largest auto insurers,
England textile mill. At the time its shares were trading had been a major stock holding of Berkshire until the mid-
around US$8 each. Now it’s a diversified business owner 1990s, when it acquired the whole company. General Re,
and financial powerhouse, one of the world’s only AAA one of the world’s largest reinsurance companies, was
rated non-government institutions. More importantly, those acquired a few years later. The beauty of these businesses
US$8 shares are now trading at nearly US$90,000 each. is that the customer effectively pays in advance for an
Berkshire became Warren Buffett’s investment vehicle of event that may or may not occur in the future. That means
choice, which means that the success of the company is there’s a lot of cash available to invest in other businesses
inextricably linked with the capabilities of the man. (in insurance industry jargon it’s called the float). It’s in the
Buffett refers to Berkshire as a ‘museum’ for great effective deployment of this cash that Buffett has made
businesses. That aptly describes his preference for some of his most astute purchases.
acquiring shares of great businesses, or whole businesses, But Buffett does not succumb to the temptation to
and keeping them for the long-term. In fact, Buffett’s invest if it is not wise to do so. Currently, Berkshire is
preferred investment holding period is ‘forever’—a great holding a breathtaking US$70bn in cash and bonds. To put
way to keep brokerage costs down. This ‘museum’ that it in perspective, Berkshire could happily purchase
currently includes very large investments in stocks like Australia’s two largest banks, National Australia Bank and
Coca-Cola, Gillette, American Express, the Washington Commonwealth Bank, without the use of debt, and still
Post and many other great businesses. Starting with the have about AUD$10bn left over (if that’s not enough to
Omaha insurer National Indemnity in the late 1960s, over convince punters that Buffett is having a hard time finding
the last 30 years Buffett has expressed a preference for value these days, then nothing will). In less than 40 years,
purchasing entire companies, or at least obtaining majority Buffett has taken a troubled New England company that
ownership. The purchase of See’s Candy—an upmarket struggled to pay its staff to an industrial behemoth
chocolate retailer—in 1972, was followed by other currently valued at around US$135bn. Let’s now look at the
purchases including Nebraska Furniture Mart, Buffalo mind-set of the man responsible for this remarkable story.

Buffett’s circle of competence

The world’s third-richest man provides myriad in by writing books about the story of his success—the
learning opportunities for investing mortals prepared books on Buffett, and there are dozens—are written either
to learn vicariously. by fans or by profiteers. For those willing to learn, Buffett
teaches in the most elementary and successful way—by
It would be easy to claim that whatever prowess your example. His story, from humble beginnings to world’s
analysts at The Intelligent Investor possess, it is due solely third-richest person, is enough to generate intrigue in any
to our own wit, intelligence and application. Sadly, to closet capitalist.
do so would be to So how has
mislead you. For many he achieved a
of us searching for an record that, over
intelligent way to half a century,
invest, a reluctance to has earned him
undertake our own the almost
costly experiments is undeniable
understandable. So why accolade of
not take a shortcut ‘world’s greatest
instead and learn as investor’?
much as one can from Whether
those who seem to be buying a whole
worth learning from? company,
Warren Buffett sits which Berkshire often does these days, or a small fractional
atop our list of preferred teachers, although he isn’t the ownership through a few hundred shares, Buffett’s thought
kind of tutor to charge $5,000 for motivational weekend process remains unchanged: Think about the business as
retreats or ‘free’ educational seminars. Nor does he cash an intelligent, rational and conservative businessperson

2 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) 9388 0042 Fax: (02) 9388 0043 info@intelligentinvestor.com.au www.intelligentinvestor.com.au
 CReport

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might when buying the whole company and it’s hard to
go wrong.
And what does that mean? It means one should
typically dispense with crystal balls, in whatever form
they may take, and learn to ignore what everyone else is
telling you. There are more important factors to consider
than others’ ill-informed opinions. As Buffett says, ‘We try
to price, rather than time, purchases. In our view, it is
folly to forego buying shares in an outstanding business
whose long-term future is predictable, because of short-
term worries about an economy or a stockmarket that we
know to be unpredictable. Why scrap an informed
decision because of an uninformed guess?’ When asked
what wisdom he might impart to people who seek to
manage investments, Buffett typically boils down his
principles into four cardinal rules:
1. Understand the business in which you are investing
‘You can’t make money in stocks unless you understand
the business. I look for businesses within my circle of
competence.’ Having a large circle is less important than
having one with a well-defined perimeter. ‘Predicting the
long-term economics of companies that operate in fast-
changing industries is simply far beyond our perimeter.’
[A strength our humble analysts strive to emulate—Ed].
Special
2. Seek out businesses with a sustainable
economic advantage
Buffett calls it ‘a castle with a moat around it.’ Coca-Cola,
of which Berkshire owns 8.2%, has a brand name that’s
straddled the globe for generations. And no competitor,
even one with billions of dollars, can replicate it.
3. Competent leadership
Companies with a durable economic advantage need
honest, capable and hardworking leaders to retain their
lead. Apply these three rules and it’s possible to find a
small number of very attractive businesses that can be
valued reasonably accurately (at least when compared to
mediocre businesses).
4. Buy at the right price
That means buying shares, or whole companies, at a
fair price or better. And in this regard, Buffett offers
another pearl of wisdom: ‘It is much better to buy a
wonderful company at a fair price than a fair company at
a wonderful price.’
That, then, is the essence of Buffett’s approach.
Nothing too flash, nothing earth-shattering, but brimming
with commonsense.

Berkshire Hathaway’s approach

Berkshire’s management reflects the qualities it shareholders generally know more about their company
seeks out in others: integrity, intelligence and energy. than any other shareholder group.
No wonder its shareholders are treated like family. Buffett thinks about stocks as a fractional ownership
in a real business—and encourages others to do likewise.
The Berkshire approach is one that we, and many That’s been a major part of Berkshire’s success. Another
others, consider highly ethical and quite unique. Buffett part has been in sticking to its knitting. ‘Charlie and I have
and Munger, despite having complete control of the no special capital-allocation expertise. If we have a
company, bend over backwards to treat shareholders as strength, it is in recognising when we are operating well
equal partners. ‘Charlie and I cannot promise you results. within our circle of competence and when we are
But we can guarantee your financial approaching the perimeter.’ He goes
fortunes will move in lockstep with on to say, ‘After many years of buying
ours for whatever period of time you ‘We do not view and supervising a great variety of
elect to be our partner.’ Berkshire shareholders businesses, Charlie and I have not
Given Berkshire’s incredible track learnt how to solve difficult business
as faceless members
record, Buffett is one manager who problems. What we have learnt is to
deserves a huge salary. But his pay, of an ever-shifting crowd, avoid them.’
which does not include options, but rather as All these attributes lead to an
wouldn’t get Linda Evangelista out of co-venturers who have incredibly low turnover in Berkshire
bed—just $100,000 a year plus a small entrusted their funds shares, which suits Buffett. ‘We do
bonus. As one shareholder put it at not view Berkshire shareholders as
to us for what may well
this year’s meeting, ‘we’re paying you faceless members of an ever-shifting
10 cents a share to manage our turn out to be the crowd, but rather as co-venturers
$90,000 investment’. A similar sized remainder of their lives.’ who have entrusted their funds to us
investment in a typical investment for what may well turn out to be the
company would set you back more remainder of their lives.’
than $900 a year in base fees alone. And it wouldn’t be Munger has even suggested that Berkshire’s
run by Warren Buffett. It’s a great deal for shareholders. shareholders chaperone dances and socials where their
But the sense of stewardship with which Buffett children and grandchildren can meet and, he hopes,
approaches his role extends further than that. Buffett’s court and marry. To do so will keep Berkshire in the ‘right
detailed letters to shareholders are legendary, as are his hands’. Can you imagine Ziggy Switkowski, or indeed any
forthright comments and desire to be held accountable other manager, caring so much for the business and its
at the company’s annual meeting. As a result, Berkshire shareholders?

The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) 9388 0042 Fax: (02) 9388 0043 info@intelligentinvestor.com.au www.intelligentinvestor.com.au 3
R1/BERKSHIRE HATHAWAY AGM
Special CReport
Woodstock for capitalists
First time for some, old hat for others, the Berkshire
Hathaway AGM was the reason for our visit—us and
19,500 others.
After arriving in Omaha on Friday 30 April, your
analysts decided to live it up. Immediately after checking
into our rooms at the Econo-lodge—84 blocks from the
city centre and with sweeping views of an eight-lane
highway, a railway line and a McDonald’s outlet—we
called up Gorat’s. This establishment bills itself as having
the finest steaks in the world and is Buffett’s restaurant of
choice. Surprisingly, Gorat’s were able to accommodate
us and, after enjoying Buffett’s favourite dish—a
medium-rare T-bone with a double side order of hash
browns—we were all in agreement that Buffett’s
stockpicking is matched only by his steakpicking.
Despite an early start on Saturday morning for the
meeting, we were unable to look around the huge
exhibition hall where Berkshire subsidiaries were plying
their wares. We wanted good seats for the day’s events.
First came the company movie, ordinarily something we’d
dread—but despite running for an hour it exceeded our
expectations (set by Gareth Brown, who was attending his
second meeting). It contained hilarious skits with Buffett
and Munger combining with the likes of Judge Judy, Bill
Gates and Arnold Schwarzenegger. There was even a
cartoon where Buffett and Munger travelled back in time
from the future to save the world from the three-way
merger between Microsoft, Wal-Mart and Starbucks
(MicroWalBucks), which would flood the world with
technologically-advanced caffeinated beverages at low,
low prices.
Buffett and Munger took the stage at 9:30am, dealt
swiftly with the official business of the meeting and then
opened the floor to questions from the 19,500-strong
crowd. One of the meeting’s hallmarks, and one of its
most enjoyable aspects, is the repartee between Buffett and
Munger, which perhaps this exchange will demonstrate.
Early in the meeting a shareholder asked about inflation
and its effects on investors.
Munger: Most investors will get a low real investment
return. You will have a good defence from inflation by not
drowning in artificial needs.
Buffett: Charlie, we’re selling consumer goods in the
other room … you may talk that way at home (but not here).
Munger: It doesn’t do any good there.
Buffett: I know the feeling.
Of course, there’s no reason why AGMs have to be
corporate events but that’s how they tend to be. The
contrast of an AMP or Fairfax AGM with that of Berkshire
‘Most people who read a lot
don’t have the right temperament.
They get confused by the
mass of material or don’t get out
the right ideas.’
4 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) 9388 0042 Fax: (02) 9388 0043 info@intelligentinvestor.com.au www.intelligentinvestor.com.au
or even our own STW Communications can sometimes
be a good guide to management’s liveliness, integrity and
humanity, all characteristics that should inspire investors’
confidence. The fact that we so rarely see these traits on
display is, in our view, a reflection of the unease and
disdain with which managers so often treat minor
shareholders. So, with that point off our chests, let’s get
into it. What follows is a selection of the gems we picked
up and the odd comment on how they relate to our
situation here in the Antipodes.
On successful investing
On the topic of successful investing, the pair made the
following remarks:
Munger: ‘It’s a life-long game and if you don’t keep
learning, other people will pass you by.’
Buffett: ‘Temperament is most important.’
Munger: ‘Yeah, but temperament alone won’t do it. Most
of it is rather tuning out folly than recognising wisdom.’
Earlier in the meeting Munger observed: ‘Most people
who read a lot don’t have the right temperament. They
get confused by the mass of material or don’t get out the
right ideas.’
Adding a little more detail to the idea of temperament,
Buffett observed: ‘Wall Street is awash with money and
talent, yet we still get these astounding swings. You want
to position yourself so this insanity doesn’t wipe you out.
Better yet, position yourself to take advantage of it.’ In a
practical example of this, in 2002 Berkshire bought a
significant quantity of junk bonds when everyone else was
panicking. In a characteristic warning, Munger stated: ‘It
was absolute chaos at the bottom tick of the junk bond
market. And that isn’t as much chaos as you can have,
especially (when it comes to) common stocks.’
On corporate governance
In describing the current situation where some people
are trying to distil good corporate governance into a
checklist which boards should be compared against,
Buffett said ‘Checklists are no substitute for thinking’.
Later in the meeting, on a similar note, he said ‘the best
way to minimise risk is to think’.
Mark Carnegie, chairman of STW Communications,
had this to say on the same issue in his 2002 report to
shareholders: ‘The calls for a more American style of
regulation from out-of-work accountants and lawyers, if
implemented here, will really hurt the economy because
the type of people it will breed in the boardroom of
Australian companies are divisive pedants who haven’t got
a useful thing to say about building a successful company
in a harshly competitive world.’ We suspect Buffett and
Carnegie, if not sharing a carriage, are certainly on the
same train of thought.
On auditors
Lamenting the sad state of affairs in the auditing
profession, Buffett displayed the four questions he believes
all auditors should have to respond to in a company’s
annual report:
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Special
1. If the auditor were solely responsible for the company’s On the topic of margin loans he said, ‘When you have
financial statements, would they have been prepared in large amounts of margin to be paid, you only need to miss
any way differently than the manner selected by the payment on one day to be in trouble.’
management?
2. If the auditor were an investor, would they have received On floats (IPOs)
the information essential to a proper understanding of Berkshire hasn’t participated in a new float for many,
the company’s financial performance during the many decades, which is why Munger said that ‘The average
reporting period? person buying IPOs is going to get creamed’. Those who
3. Does the auditor know of any operational facts that stumped up $7.40 for the second tranche of Telstra know
caused the company’s sales or profit to move that feeling. And that was a government selling to its voting
significantly from one quarter to the next? public. Investment banks have even less incentive to price
4. Is the company using the internal audit procedures that new floats fairly (let alone cheaply).
would be followed if the auditor were CEO?
He also displayed Berkshire’s auditor’s response to each On the economy
question. Unsurprisingly, the auditor had an easy job The discussion on this issue was most insightful. Whilst
answering them. Subscribers might like to take these Buffett is known as a stockpicker, he’s no economist and
questions to their next AGM and watch with interest the is happy to make the distinction, saying, ‘Even in 1974,
beads of sweat form on the heads of those charged with when stocks were screaming bargains, you could have
answering them. made a long list of pessimistic factors. We’ve never passed
on a wonderful business due to external factors nor taken
On derivatives a mediocre one because of them. If investors do poorly
Buffett has been issuing consistent warnings about over the next few decades it will be because they do
derivatives in recent years and this year was no exception: themselves in, not because the economy does them in.’
‘A lot of things correlate in the investment world that We think those buying the likes of Caltex, BlueScope
people don’t expect to correlate. And much operates on a Steel and FKP at fancy prices today should take heed of
hair-trigger in the securities world’. Then, more chillingly, these words.
he said: ‘We predict that in the next 10 years some big
troubles will either be caused by or accentuated by On current opportunities
derivatives.’ We’ve frequently bemoaned the lack of investing
Some high profile people, including Federal Reserve opportunities in times of high prices such as the one
chairman Alan Greenspan, have countered that derivatives we’re currently experiencing. Buffett’s words, though,
actually spread offer some
risk around the consolation to
financial system ‘We’ve never passed on a wonderful business due to those who have
and are, therefore, external factors nor taken a mediocre one been following
a welcome our recent advice
because of them. If investors do poorly over the next
development. to patiently
Without naming few decades it will be because they do themselves in, stockpile cash: ‘If
names Buffett not because the economy does them in.’ you think you’re
stated, ‘In general going to see an
derivatives have opportunity every
spread the risk but what counts (are the cases where they week, you’re going to lose a lot of money.’
have) concentrated risk.’ In a similar vein, he remarked, ‘We plan to make more
Munger also chimed in on the topic, saying ‘Problems mistakes of omission rather than commission.’ In other
(occur) when people don’t think about the consequences words, he plans to miss more winners in order to avoid
of the consequences … (recent) mistakes show that losers. As far as such advice applies to us here in Australia,
sophistication won’t save you.’ He was referring to it means happily missing rises in stocks like IAG and Sims
situations where smart people have made big mistakes Group so you have plenty of cash on the sidelines when
such as the implosion of the poorly-named hedge fund the real slam dunks present themselves.
Long Term Capital Management.
National Australia Bank has recently provided a On asset allocation
comparatively small example of what can happen when Berkshire has never followed a set policy of having a
derivatives go wrong. We hope there is no more to come certain percentage of its assets in any particular type of
from Australian financial institutions but fear there is. investment. Such structures are anathema to Buffett and
Munger’s opportunistic style. On the topic of portfolio
On debt (including margin loans) construction Buffett said, ‘Your default position should be
When asked about the use of leverage (debt) Buffett short-term instruments, then do something when an
remarked, ‘The only way really smart people can get opportunity comes along.’ He continued, firing a broadside
clobbered is by the use of leverage. It’s the one thing that at the way many financial planners operate: ‘Much of the
can prevent you from playing out your hand. All of our industry tries to make you feel that you need to know what
hands look pretty good to us but we need time to play them percentage to have in each asset class, when you don’t.’
out.’ We currently feel that way about Miller’s Retail. The
hand looks good to us but it may take a while to play out. [ CONTINUED ON PAGE 6 ]

The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) 9388 0042 Fax: (02) 9388 0043 info@intelligentinvestor.com.au www.intelligentinvestor.com.au 5
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Woodstock for capitalists [ CONTINUED FROM PAGE 5 ]
On hedge funds
Buffett and Munger are both bemused by the rise and
rise of hedge funds, the latest investment fad. Many
subscribers would have read marketing material from the
OM-IP series of funds and others promoting hedge funds.
Buffett urged people to maintain healthy scepticism in the
face of heavy marketing pressure, saying ‘You don’t get
smarter just because you run something called a hedge
fund, or a private equity fund or LBO firm. What you do
get, periodically, is the ability to merchandise it.’
On low probability events
The following statement from Buffett gave some insight
into why Berkshire has been so successful in the insurance
game: ‘The tendency is to underestimate low probability
events when they haven’t happened recently and
overestimate them when they have. That’s just the nature
of the human animal. Our nature (at Berkshire) is to think
about low probability events a lot.’
That kind of mentality also has implications for the
wider investment world. The banks are sometimes referred
to as ‘safe, defensive’ stocks by the media (and even some
analysts). But noises like that weren’t being made 10 years
ago. The fact that it’s been more than a dozen years since
the last property crunch means that many people are
underestimating this ‘low probability’ event (which isn’t so
low in our view). We don’t wish to cause alarm but we do
want subscribers to be mindful of the potential for large
price falls in bank shares if there is a property bust. While
we’re digressing somewhat, another point we’d like to
make is that no stock is defensive by nature. A business
may be defensive but priced at such a high level that the
overall investment package becomes anything but.
On liquidity
When asked about whether a stock split might help
Berkshire’s liquidity and ‘price discovery’, Munger replied,
‘The stuff that’s spoken about in academia about liquidity
is mostly twaddle. England banned liquid common stocks
Wesco Financial meeting
Charlie Munger may not be as well known as Warren
Buffett but his ruminations are always enthralling.
Of the 19,500 people who attended the Berkshire
Hathaway meeting, about 1-in-20 made the journey to
Pasadena, California for the Wesco Financial meeting,
chaired by Charlie Munger. We’re big fans of Munger, so
the extra time with him, combined with the smaller crowd,
made the additional expense easier to bear.
The meeting followed much the same path as
Berkshire’s. Munger sailed quickly through the resolutions.
He even added a wise crack. After asking for those in
favour of a resolution to say ‘aye’, he then asked for those
opposed. Following a brief silence he said, ‘Those people
can leave.’ After the formalities, Munger launched into a
6 The Intelligent Investor PO Box 1158, Bondi Junction NSW 1355 Phone: (02) 9388 0042 Fax: (02) 9388 0043 info@intelligentinvestor.com.au www.intelligentinvestor.com.au
after the South Sea bubble. If you believe liquidity is a
prerequisite then you must think all of America’s real
estate hasn’t been developed properly.’
We couldn’t agree more. We hear a lot of rubbish about
the importance of liquidity. Often it comes from companies
where a major shareholder is selling down in order to
provide more liquidity. The implication is they’re doing
this out of the goodness of their heart. We note that an
illiquid but successful company like Reece Australia has
performed very well over the years without the need for
millions of shares to change hands each day.
On numbers and the nature of thought
A shareholder asked Munger to elaborate on a previous
year’s comment relating to mathematics revealing the true
nature of thought. The question was, effectively, ‘Why is it
so?’ To which Munger deadpanned: ‘That’s just the way it
is. If you’re innumerate in business you’ll be a klutz. But
higher maths can get you in a lot of trouble.’
On the herd mentality
Buffett made the following observation: ‘Too often
shareholders have acted like sheep in this country and
often been shorn.’ That applies to both their voting on
resolutions at meetings and also their behaviour in buying
and selling.
‘That’s just the way it is.
If you’re innumerate in business
you’ll be a klutz.
But higher maths can get you
in a lot of trouble.’
30-odd minute speech covering a variety of topics on his
mind before opening the floor to questions. Here are our
selections.
On ethics at Berkshire
‘This place tries harder than most to be rational and
ethical although, with 175,000 employees, I’ll bet one of
them is probably doing something I wouldn’t like right
now but, overall, Berkshire has been remarkably free of
scandal over the decades.’
On accountants selling out
‘When I was young, most accounting firm senior
partners were Scottish—more than half were. And they
were quite ethical places and nobody got filthy rich—I

know because I handled some of their estates. There were
many chiefs and few Indians. But in the space of 25 years
they sold out, one step at a time. Once you start doing
something bad, then it’s easy to take the next step. You
start as a bright fellow and end up in a moral sewer.’ He
went on to describe how he had first hand experience of
leading accounting firms actively selling fraudulent tax
shelters. The schemes were ‘obscure enough that the IRS
wouldn’t notice’. He went on to say, ‘One after another
the accounting firms went into it and the lawyers got paid
big fees.’
On opportunity
On the current lack of investing opportunities, Munger
said that ‘this is the most extreme period we’ve ever been
in. In the past, we’ve just been patient and we were able
to put it to work.’ This observation puts further colour into
Munger’s comment from the annual report on the same
topic. In the report he says that ‘the one thing that should
interest Wesco shareholders most with respect to 2003 is
that, as in 2002 and 2001, Wesco found no new common
stocks for our insurance companies to buy.’ (his emphasis)
We’ve been experiencing the same sort of pain for a
little while now. We also note similar noises from the
managers of a few of the newer listed investment
companies such as MMC Contrarian and Wilson
Investment Fund.
On Berkshire’s success
‘If you took Berkshire’s top 15 ideas out, the record
wouldn’t be great. It wasn’t hyperactivity but a hell of a lot while its main competitor, The Warehouse Group’s
of patience. You stuck to your principles and when
opportunities came along, you pounced on them with
vigour. With all that vigour, you only made a sensible deal On success
every two years. We do more deals now but it happened
with relatively few decisions and staying the course,
relentlessly, decade after decade and holding our fire until his favourite topics. Being a keen bass fisherman, he
something came along worth doing.’
On consumer debt
When asked whether the ballooning level of consumer
debt might lead to sudden inflation or gradual deflation,
Munger replied, ‘I’ve made no money from macroeconomic
predictions. Of course I’m troubled by huge consumer
debt levels. We’ve pushed consumer debt very hard in the
U.S. Eventually, if it keeps growing, it will stop and it will
be unpleasant. As Herb Stein said “If something cannot go
on forever, it will stop.”’
Australia hasn’t been immune from this worrying
trend either. And, were it to end unpleasantly as Munger
suggests, the big banks could easily cop an uncomfortable
portion of the fallout. For those of us holding the big
banks, let’s hope that doesn’t come on the heels of a
crashing property market.
On baby boomers
One question related to an issue we are asked about
from time-to-time: people trying to cash in on the ‘baby
boom’ generation. Munger said, ‘Regarding the
demographic trend called baby boomers, it’s peanuts
compared to the trend of economic growth. [U.S.] GNP is
up over seven times this century. This was not caused by
baby boomers but by the general success of capitalism and
the march of technology.’ To us, the tough underlying
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CReport
R1/BERKSHIRE HATHAWAY AGM
Special
economics of businesses like FKP and Primelife (which
operate retirement homes), are more important than trying
to catch the baby boom wave.
On corporate acquisitions
‘Most people who try acquisitions don’t do well. Even
if 90% are no good at acquisitions, everyone looks around
and assumes they’re in the 10%.’ We think this observation
applies to Tabcorp’s relatively new, highly-acquisitive
management. The same might also be said of Telstra and
Fairfax (among many, many others).
On corporate accounting
‘So much money swings on what’s reported and it’s so
easy to report a little more or a little less. The world would
work better if everybody had a consistently conservative
approach to accounting.’
On predicting the nature of competition
A shareholder asked why some industries compete
fiercely while others don’t. Munger said he knows ‘no way
of predicting how two competitors will behave. If you can
figure that out you’ll make a lot of money. Sometimes they’ll
compete in a gentlemanly fashion, other times they’ll beat
each other to a pulp.’
We were painfully reminded of these wise words when
Miller’s Retail made its recent profit warning following
continued fierce competition in the discount variety
business. Thankfully, Miller’s should be the last man
standing, so to speak, as it continues to produce profits
Australian operations, sport eight-figure financial scars.
When asked by a young shareholder about his tips for
success, Munger had an opportunity to speak on one of
cleverly managed to weave one of his favourite pastimes
into his answer. He said asking someone how they became
a successful investor is ‘like asking the winner of a bass
tournament how he jiggled the lure.’ The question is, ‘Why
do some people get wiser than others? Partly it’s
temperament. Most people are too fretful, they worry too
much. (Investing success) involves great patience and
(unusual) aggression when the time is right. The game is
to keep learning but people sometimes don’t like learning.’
He later added that four factors contribute mightily to
successful thinking: ‘Curiosity, concentration, perseverance
and self-criticism.’ He then went on to make a point we
found most interesting: The ability to ‘destroy your own
best-loved ideas’ is important. ‘Any year where you don’t
destroy one of your best-loved ideas is probably wasted. It’s
a very useful thing to do.’
And some comic relief
When a shareholder asked Munger about the effect
Wesco has on the price of shares it buys he replied:
‘That’s like asking Rip Van Winkle what he thought of the
last 20 years … it’s been so long since we bought anything.’
‘Curiosity, concentration,
perseverance and self-criticism.’
7
R1/BERKSHIRE HATHAWAY AGM

Special CReport
Further reading and research
If this report has whetted your appetite for Buffett and Munger, try these other sources.

This page is dedicated to those people who, like us, can’t get enough of this sort of thing. It contains a list of
recommended reading on Buffett, Munger and Berkshire-related material. We have also included a list of books
recommended by Buffett and Munger at both this year’s and previous years’ meetings. Finally, we have a list of relevant
websites which may be of interest to those with internet access. Forget an MBA, this page contains almost all you need
to know to become a successful investor.

THE INTELLIGENT INVESTOR ’S RECOMMENDATIONS

Buffett: The Making of an American
Capitalist by Roger Lowenstein.
While not as comprehensive as the
next book on our list, we find this
one to be the best introduction to
the man and the company, it being
a well-written, well-structured
biography.
Of Permanent Value: The Story of
Warren Buffett by Andrew Kilpatrick.
This one grows in size, and weight, on a regular basis
as the author adds to it in new editions. But it’s only for
the fanatics.
BUFFETT AND MUNGER’S RECOMMENDATIONS
The Essays of Warren Buffett: Lessons for Investors
and Managers by Lawrence Cunningham. This is a
collection of Buffett’s annual letters to shareholders,
sorted by topic.
Damn Right! Behind the scenes with Berkshire Hathaway
Billionaire Charlie Munger by Janet Lowe. Some Munger
fans were a little disappointed by Lowe’s biography but
it provides some valuable insights nonetheless and
contains a couple of excellent Munger speeches.
The Warren Buffett CEO: Secrets from the Berkshire
Hathaway Managers by Robert Miles. This book contains
profiles on many of Berkshire’s key managers. We found
the insights from portfolio manager Lou Simpson of
particular interest.

Security Analysis by Benjamin Graham and David Dodd.
We understand that Buffett’s preferred edition is the
second one (1940) which, thankfully, has recently been
re-printed.
Common Stocks and Uncommon Profits by Phil Fisher.
This comprehensive work was important in shaping
Buffett’s investment approach.
In an Uncertain World: Tough Choices from Wall Street
to Washington by Robert Rubin. Here are Buffett’s own
words on this interesting autobiography: ‘As Secretary of
the Treasury, Bob Rubin ranked with the best. This
drama-packed account of his years on the job should be
read by all who are interested in what happens when
politics and economics intersect.’

Influence by Robert Cialdini. This excellent book deals
with seven ‘weapons of influence’ and is one that Munger
has strongly recommended for many years.
Guns, Germs and Steel by Jared Diamond is another
Munger recommendation. It’s a fascinating exploration
of human history since the last ice age.
The Selfish Gene by Richard Dawkins. Another Munger
favourite, this groundbreaking work reformulated the
theory of natural selection and, best of all, is quite
readable for non-scientists.
Deep Simplicity: Chaos, Complexity and the Emergence
of Life by John Gribbin. This was Munger’s
recommendation at this year’s meeting. Available online
from the UK Amazon website (www.amazon.co.uk),
we’ve been impressed with other Gribbin books so it’s
definitely worth a look.
A Short History of Nearly Everything by Bill Bryson.
At the meeting Buffett said he was enjoying this book.
It’s another one we haven’t tackled yet but is on the list.
The Intelligent Investor by Benjamin Graham.
Our namesake and Buffett’s favourite book on investing.

ON LINE REFERENCES

www.berkshirehathaway.com contains all of Buffett’s www.oid.com American publication Outstanding Investor

letters to shareholders and is an invaluable resource.
www.tilsonfunds.com Fund manager Whitney Tilson
does a great job of covering both meetings and his
comments and articles are free—thanks Whitney.
www.woodstocksforcapitalists.com is a website devoted
to a whimsical Australian documentary of a recent
Berkshire AGM.
Digest contains abridged transcripts of the Berkshire and
Wesco meetings each year as well as lots of other
interesting material. Buffett has said the following about
the publication: ‘Anyone interested in investing who
doesn’t subscribe is making a big mistake.’ That’s a huge
accolade but, be warned, it is very expensive.

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