The weekend of April 30, 2011 was an exciting one! I spent the weekend in Omaha, Nebraska at the Berkshire Hathaway Annual Shareholder meeting with Warren Buffett himself! Here are some of my favorite and biggest takeaways from the event.
This year, I made my second annual pilgrimage to Omaha to see Warren Buffet and Charlie Munger discuss the future of Berkshire Hathaway.
BRK2011: Berkshire Hathaway Dividend Policy
As a shareholder (I own the less valuable B-shares, knows as the “Baby Berkshires”), I am interested to see how the company is being managed as I would like my investment to increase in value. As a lifetime learner, I am fascinated to see how the third richest man in the world amassed such a large fortune and led his company to growth that consistently beat the index and created many millionaires.
One question Warren Buffet and Charlie Munger answered related to Berkshire Hathaway’s dividend policy. The company has never paid a dividend and, until the recent purchase of Burlington Northern Santa Fe Railway, had never split. The stock has just increased in value every single year, except for two, since the company’s inception.
Buffet said that he feels strongly about the company’s dividend policy. Every year, the company’s managers work hard to allocate capital to projects that will return more than one dollar in book value per share for each dollar invested.
This is a fantastic concept and the core of Warren Buffet’s, and his well known teacher Benjamin Graham’s, investment strategy.
Value investing is designed to find an investment opportunity, find the intrinsic value of the company inclusive of growth prospects, and compare the intrinsic value to the price of an investment. If the company is undervalued, you invest. If it is overvalued, you don’t.
Buffet said that the company continues to find investment opportunities that create a great return for shareholders. The recent high profile purchases of Burlington Northern Santa Fe Railway and Lubrizol are proof of the continued drive to increase value. The BNSF takeover has outperformed expectations and has created a major cash stream for the company.
A less understood, but incredibly large, portion of the company is invested in insurance. General RE and other segments require a strong capital structure to produce historically high returns, but must be liquid in case the cash is needed, as was the case with the recent Christchurch, New Zealand and Japanese earthquakes.
Over time, however, the portfolio companies generate cash that has to be used for something. It will either be used to invest or must be returned to the shareholders.
Buffet said that the stream of large investment opportunities will not last forever. Some companies are too big to incorporate and others are too small to be worthwhile for such a large company. The sweet spot in the middle is difficult to come by, and the number of opportunities is decreasing.
With that in mind, Buffet said that Berkshire Hathaway would inevitably have to pay a dividend some day. If the company cannot find an investment worth more than a dollar, it is better to return the dollar to the shareholders.
He hopes that day is far away, but it will come some day. He expects that the stock will drop when that day comes, as it is an admission by the managers that they can no longer perform to the levels of the past.
My Take on It
Buffet had a sad tone in his voice when he admitted that opportunities would inevitably dry up, but I have faith that there is a long enough runway that we will not see this situation come up in the near future.
BRK2011: Berkshire Hathaway Future Leadership
We have discussed the dividend policy, which is a forward looking discussion of Berkshire’s ability to generate a strong return. None of that will be possible, however, unless Berkshire Hathaway has strong leaders.
Berkshire Hathaway was built almost single handedly by Warren Buffet starting in the 1960s. When he returned to Omaha from school in New York, he managed the investments of his friends and family and used the capital dollars to build the company we have all come to know today.
Over time, his company grew and he added other staff, most notably Charlie Munger. The company now employs about twenty people in its main office on Farnahm Street in Omaha, Nebraska.
Warren Buffet is 80 years old. Charlie Munger is 87. These two brilliant men have led Berkshire Hathaway’s investment and acquisition portfolio to create unrivaled returns and value for long time investors.
They are old. They will not live forever.
It was long presumed that the next CEO of Berkshire Hathaway would be David Sokol, a Berkshire Hathaway manager that joined during the MidAmerican Energy Holdings acquisition. He was then put in charge of the turnaround of NetJets, another Berkshire company.
Sokol’s name hit the headlines in March, 2011 for his involvement in what appears to be an insider trade involving the acquisition of Lubrizol. He has since resigned from his position at Berkshire Hathaway and is under investigation by the SEC.
Warren Buffet is the Chairman and CEO of Berkshire, but those are big shoes to fill. At the annual meeting on Saturday, Buffet announced that the roles of Chairman and CEO would be split.
The next Chairman of Berkshire Hathaway will be Howard Buffet, Warren’s oldest son. Howard has been involved in the business for some time and is currently a Director for Berkshire Hathaway and Coca Cola. His past business experience and lifetime dedication to the company make him a prime candidate to succeed his father as Chairman. However, he does not have the operational knowledge and experience, in my opinion, to take over the CEO role as well. Warren agrees.
No one knows who will be next in line to helm one of the largest companies in the world. I imagine the current CEO of BNSF Railway, Matthew Rose, has a good shot. It is hard to know for sure today, which does leave some room for speculation.
BRK2011: Berkshire and a Green Future: Shareholder Proposal
The proposal that started the debate:
Emily S. Coward, 2020 Pershing Street, Durham, NC 27705, owns 62 shares of Class A Common Stock and has given notice that a representative of hers intends to present for action at the meeting the following proposal.
Resolved that Berkshire – in response to strict new EPA regulations – establish quantitative goals for the reduction of greenhouse gas and other air emissions at its energy-generating holdings; and that Berkshire publish a report to shareholders by September 30, 2011 (at reasonable cost and omitting proprietary information) on how it will achieve these goals – including plans to retrofit or retire existing coal-burning plants at Berkshire-held companies.
This is an incredibly complex proposal for a company like Berkshire Hathaway and requires a lot of background knowledge, scientific understanding, and business acumen to fully understand. I will try to give you the executive summary version here.
Greenhouse Gasses and the Environment
The scientific evidence that greenhouse gas emissions, such as those from burning fossil fuels like oil, natural gas, and coal, are having a massive impact on our atmosphere, ecosystem, and planet. If you think this is fabricated or not proven, you are either stupid, ignorant, or trust Rush Limbaugh over science. The evidence is clear.
We can debate all day about how much of an impact we are having and whether we need to take actions to avoid our impact. That is subjective. But we are having an impact.
My personal opinion is very strong and clear. We need to, as a global society, do all we can to eliminate greenhouse gas emissions from fossil fuels. However, even if the United States never put out another ounce of carbon into the atmosphere, the impact from China’s coal power plants alone has the potential to impact our planet’s temperature and ecosystems.
The Polar ice caps are shrinking. Ships have used the northern passage for cargo transportation. That would have been impossible just a few decades ago. I have seen the dead coral reefs in the Caribbean with my own eyes.
I have lots of ideas on how to fix this issue, but none are immediate and all are expensive.
Berkshire Hathaway Impact
Berkshire Hathaway owns several energy focused companies. The largest and best known is MidAmerican Energy. As of a recent initiative in Iowa, MidAmerican is the number one wind electricity generator in the United States. In addition, Buffet is a nuclear energy advocate.
These are two major steps in securing our energy independence in a way that does not destroy the planet. Despite what you may have heard, nuclear is the safest and cleanest energy to meet base load needs. Wind, in combination with solar and hydro, can meet our peak demand needs.
Based on their current track record, I trust that Berkshire Hathaway managers are on the right track for a move to profitable, clean energy forms.
My Take on the Vote
There were passionate speakers both for and against the shareholder resolution. While more people spoke for it, it seemed that the crowd was against it. From my position, it appears that most Berkshire investors either don’t care about the environment or don’t understand it. I am always shocked to hear people say that global warming is not real. It certainly is, and it is not “hot air” as one commenter stated.
However, as an investor and a finance minded person, I am in the camp with Milton Friedman. The purpose of a business is to make money. Warren Buffet and the Berkshire board agree.
I do support moving toward cleaner energy. I am a huge nuclear advocate. However, a shareholder meeting is not the forum to change the world. It is a forum to increase profits.
The resolution failed, as I expected it would. However, I hope Berkshire and other energy companies continue on the path toward more renewable, sustainable energy that will not destroy our planet.
Do you think this was the right thing to do? Is it the responsibility of big business to protect the environment pro-actively?
BRK2011: Inspiration from the Berkshire Hathaway Shareholder Meeting
Finally, I want to talk about the inspiration and enthusiasm from participating in the “Woodstock for Capitalists” in Omaha. Now that we have discussed dividends, leadership, and environmental policies, it is time to focus on something a bit more fun.
Sitting in the room with Warren Buffet, Bill Gates, Charlie Munger, the entire Berkshire board of directors, and countless millionaires, I turned to my friend and asked, “Do you think there is a higher net worth in this room than anywhere else on the planet right now?”
I have put a ton of time into my financial education. I have spent countless hours studying and analyzing investment opportunities, stocks, bonds, returns, interest rates, investor psychology, and a plethora of other finance concepts.
Going to the Berkshire meeting is evidence that what I am doing can work quite well. If you work hard, make smart investments, and stick to your principles, you can get rich. It really does work.
We took a couple of hours to head out to the Omaha airport to tour the NetJets exhibit. When I get so ridiculously rich that money is not an object, there will be only one way to travel.
I had never been inside of a corporate jet before, and I was able to tour a Cessna Citation and Gulfstream 450. It was really “like a G6.” Wow. That was like walking straight into luxury.
We can all dream of great things, but only some of us will actually get there. I intend to be one of those people.
The difference between the perpetual dreamers and those that reach their goals is planning and action. I know some people with a great retirement plan: “win the lotto.” My retirement plan is to work hard and aggressively save so I can retire early.
Some people wait around for their million dollar idea. I have tried a few. One in ten entrepreneurs succeeds, so as far as I am concerned it is a numbers game. Take action and keep trying, while learning from your past, and you can do anything.
I saw a $7.5 million ring at Borsheim’s. I plan to never spend to that level of excess, but it would be great to have the ability to buy that for future Mrs. Eric. I saw a long line of private jets at the airport terminal. I want to be able to do that someday (sooner than the $7.5 million ring.)
I want to be able to live my dreams, and the Berkshire weekend is proof that I can do it. I will. Just keep watching.
Disclosure: I own shares of Berkshire Hathaway in my retirement portfolio.