Berkshire Hathaway AGM: 1994

@dmuthuk @FI_InvestIndia @Prashanth_Krish @Gautam__Baid @NeerajMarathe @Vivek_Investor

Key Takeaways

Thread 🧵👇
1. Minimum FCF required when buying a company at IV

Warren - We would conceivably buy a business with negative FCF only if it can have a good future. If the PV of the future cash flow is attractive to CMP we would not be overwhelmed with the first year report.
We always see business over a longer period of time in which the next 1-2 year cash flow nonetheless matters to us.
2. Discount Rate for valuation

Munger- We don't care what we report in the first year or two after buying anything. At 7% bond rate we would be discounting at 10% rate. 10% rate makes sense because the minimum return you wish to have in the future you discount at that rate right
3. Reason for higher Intrinsic Value of insurance than its BV.

Warren- Float is majorly valued higher than the book value. It's hard to quantify. Even taking pessimistic value, however looking at the cost of float and the trend of float.
Eg. Berkshire came from a float of...
20ML to 300BL which has so much cost involved. And in 1993 the float gave underlying profit of 200ML and when the business is having good prospects there is some involvement of premium.
4). Judging the management

Warren- Judge by two yardstick. One is how well they run the business (what they have accomplished vs how their competitors have accomplished). Read how they are allocating the capital....
Simply how well they are doing and playing hand second could show how well they do treat their owners.
It is tricky to predict but not that difficult.
But reading the reports or competitors reports can give you sense and you have to predict only 40-50 such entrepreneurs in life
Compare what they have performed vs what their competitors have performed.
Always beware on the promoter who is discussing its intrinsic value of the company many times in its report of discussion
4. Operational aspects of Warren and Munger for Berkshire

Warren- Majority of the managers of Berkshire are financially free. This is what I and Munger manage. As the managers are financially free, they don't feel they are going for a job or so.
They try to create always more than a business relationship which makes all the managers feel this is their own business only and they don't tend to overlook building their own but let them admire this as their own business.This makes them feel they are running their own business
5. Situation when Warren will be no more?

Warren- Berkshire will do fine. We have a wonderful group of businesses. We won't have problems because of good managers. There would be no change in ownership structure.

Charlie- When you have good businesses there is less of fear.
6. Valuation on Berkshire

Warren- Decisions should not be made on other opinions. Investing is not an opinion poll where you ask everyone opinion. Charlie and I never read, what market is going to do and what interest rates are going to do.Focus on your analysis and improve that
7. Views on banks that are repurchasing its shares, and views on bank focus for goodwill

Warren- It matters of case to case. If the company is buying when the IV looks cheaper than CMP but usually it matters on a case to case.
Treatment of goodwill "We don't care what accounting terms goes on. Goodwill of business can eventually be understood without the entry also. Goodwill of business can itself be identified.
Management Explaining much on accounting is unproductive.
If you find the management that doesn’t care about the accounting but does explain you is clearly going on the business, you can consider it as +1 point
8. Q from @BillAckman -Solomon business leverage 30x with narrow margins and earns modest ROE, what’s your view

It can be looked at their leverage is low compared to peer but high leverage as well.
The test can be compared as:
A). Control at business and leverage does not prove dangerous
B). What ROE are they earning? It should be higher ROE than that of the case when there is almost no leverage"
9. View on Tobacco business

Warren- Future of tobacco business, I don't know much. It is fraught with societal attitudes. I would not like to have any significant stake in the tobacco business, the economics of the business is fine
10. How to find usefulness of product

Warren- See the utility of the product in market. It is difficult to come at an independent decision. Product Utility varies among different people. One can go for the endorsement of the product in the market. But it is more sort of belief.
11. Best book other than finance field.

Warren- Ben Graham biography
The People vs Clarence Darrow by Jeff cowan

Charlie- Master of the game By Connie Brooke
Re-reading Vandorns biography on Benjamin Franklin
12. Retirement plan of Warren and Charlie

Warren- Charlie and I are never going to retire"
13. How you think on overseas Diversification
"All we want to be is in the business we understand, the management we want and the future prospectus. We don't have any such region specific sort of I like that region so expand there.....
Projects matter. Eg. Gillette was expanding in China but Chinese don't often shave and use dry or wet shavers but co-cola business can be there comfortably."
14. Interest rate sensitive investment in Berkshire

Warren- Value of every investment is sensitive. Every business by its nature is sensitive to interest rates. I don’t have a view on interest rate for finding the IV of the business. It is based more on business prospects.
15. Reinsurance business and Retroactive market

Warren- Retroactive insurance has been eliminated by development of the accounting market. When we write workers compensation with a policyholder dividend it is retroactive but it is a very small amount (almost insignificant).
Reinsurance business by its nature has very stupid things. You don’t really find out who has been swimming nakedly until the wind blows.
16. Do the speed of information effects the investment decision

Warren- We don’t get affected by information. We have followed the path of reading AR for the past many years. Investing won’t be affected if the information flows to your two week later or so.
17. Philosophy of Peter Lynch and Warren.

Warren- Peter has a bit of a different way of investing and his past has very good track records. He loves to diversify a lot (almost more than 100 stocks as we know). There are certain kinds of overlap in the framework as well....
But as I said there are many ways to get to heaven. I like him personally.
18. Thoughts on making Berkshire into smaller entities.

Warren- There is no magic to make money only from small investment. There is no stoppage to earning the same rate of return from big businesses. We are still capable of earning the same return”
Munger- Berkshire is entire decentralized and its investment are made in way that there no changes in the risk return part
19. Berkshire on managing cash limits during crash

Warren- We do generate cash in considerable amounts, so that we will not husband cash, because we think the market’s going to go down, in order to buy something. As cash comes in from investing we’re always looking for things...
to do. And when the market is cheaper, the more likely we will find something that we understand to be price attractive and there we will invest in it.
We would be selling things at lower prices to buy things at lower prices. But to the extent that we have net cash coming in.
20. Investment in Co-Cola vs Writing Puts

Warren- We have not done that very often, and we’re unlikely to do very much of it. It’s not something we’re really very likely to do. I was happy to do it, and in that particular case, we made 7 1/2 million dollars.
If we like something well enough to write a put on it, we’re probably better off buying the security itself.
21. Buying stocks of big investors based on news.

Warren- I don’t think people should be buying stocks because they’re reading in the paper that we’re buying something. But if they do, they may get cured of it at some point.
22. Buying stocks of big investors based on news.

Warren- I don’t think people should be buying stocks because they’re reading in the paper that we’re buying something. But if they do, they may get cured of it at some point.
23. Impact price on shares, when sold in the market

Warren- It depends on market condition, It depends on tender offers, or we want to sell. Size is a disadvantage both in point of buying and selling. However we sell so infrequently that it’s not a crusher on the negative point.
24. Do Berkshire hedge currency?

Warren- We don’t hedge currency. We do not know much about the currency market. We do not know more than the market about the currency market. Hence there is no reason to incur those costs, and it really doesn’t go out that far anyway...
We wouldn’t worry about some portion of earnings coming from a mixture of currencies, we would prefer the dollar, but we don’t lose sleep over the fact that it may be coming from a mix of currencies like that.
25. How you come up with Economic Value or Intrinsic Value

Warren- Economic Value of any asset is the PV of the future cash. Now if I and Charlie don’t have the faintest idea of what will be the cash of the company in the next 20 year you cannot have the IV....
So, if you think you know what the price of a stock should be today, but you don’t think you have any idea what the stream of cash will be over the next 20 years, you’ve got cognitive dissonance.
26. Accounting Report

Warren- There are no answers in the financial statement. There are guidelines on something about how you can get on the IV. For that you have to understand certain things about the business....
Accounts of the company helps us to get the guidance how the company has done the business up till now and knowing the business after that helps us getting IV.
27. What growth rate to apply on the company

Warren- We are willing to buy companies that are not going to grow at all. We are not looking at projecting nos out, what cash we think we will get overtime. If you put a 1Mil $ in a savings account that paid you 10% and never changed
or rather something that paid you 2% a year increasing 10% every year. Well, one can work out on the nos. to get the answer. There’s a huge difference in the business that grows and requires a lot of capital to do so, and the business that grows, and doesn’t require capital...
Some of our business do not grow at all, but they throw lots of money, from which we can buy something else, and therefore our capital is growing, without the growth in the business.
28. Staff Berkshire has for capital allocation

Warren- We don’t have any staff for that. We tell them in the mail and we allocate the money ourselves, and we feel that is our job. And I have said in the past, it is an important job for most management to know how to...
allocate money in the business. And if capital allocation is not the key function of the job of the management, you are going to make a lot of mistakes.
29. What are the 2 or 3 key investment lesson one can learn from John Keynes

Warren- Chapter of General Theory related to market and psychology of market participants and so on. And 2 and 8th chapter of Intelligent Investor.
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