BUSINESS WEEK ONLINE
May 5, 1998
Edited by Douglas Harbrecht
"Hello, I'm Warren Buffett, and welcome to Berkshire Hathaway's annual shareholder meeting."
With that characteristically modest introduction, the legendary chairman of Berkshire Hathaway was greeted with a rousing ovation by 11,000 shareholders at Aksarben (Nebraska spelled backwards) Coliseum in Omaha on May 4. Buffett fielded questions for nearly six hours, with a small break for lunch.
Buffett was accompanied on the stage by longtime partner Charlie Munger, who periodically offered dry, humorous comments but more often left it at "I have nothing further to add."
In the past decade, Berkshire stock has had an average annual return of 31.6%, vs. 17.8% for the Standard & Poor's 500-stock index. So far this year, the stock is up some 50%, outpacing both the broader market and most of the large-cap stocks such as Coca-Cola, Gillette, and Walt Disney -- which make up a large part of Buffett's investment portfolio.
You can chalk up Berkshire's performance to the Buffett premium. The thousands of people who flocked to Omaha aren't just shareholders -- they're true believers. Paul and Melinda Hendricks have been A shareholders since the mid-'80s. This is the second annual meeting they've attended, and they say their investment has meant more than just great returns. "We get a lot out of this," says Mr. Hendricks. "You meet great people."
Indeed, the event had more the feel of a fraternity gathering than of a shareholder meeting. Many of the people who attended were new recruits, owners of the so-called baby Berkshires, or "B" shares, which were issued in early 1996 at a price of $1,000. Their investment has more than doubled so far. Though their shares and the overall market have risen to dizzying heights in the past two years, none of these investors seems worried about high prices.
But Buffett sure was worried. "People have unrealistic expectations," he said. "They're coming into the market everyday because they feel they've missed the boat." While Buffett regularly suggests that investors lower their expectations in his annual chairman's letters, his notes of caution have been more frequent and emphatic this year. "Our idea of tough times is now," Buffett told the crowd.
Finding good investments for his $46 billion investment portfolio is getting harder all the time. Last year he spent more than $5 billion on uncharacteristic investments in zero-coupon bonds and silver bullion. Asked whether he felt that the high returns on equity of U.S. corporations were sustainable, Buffett replied: "We wouldn't base our actions on the idea that they are." Added Munger: "We won't have many more 17%-18% annual returns. We can almost guarantee that."
But the caution fell on deaf ears at the shareholders' meeting. People were happy just to be in the presence of the Wizard of Omaha.
Here are some of the comments offered by Buffett at the shareholders' meeting:
Share buybacks: "I approve of them for great companies like Coca-Cola. There are very few times in Coke's history when it wouldn't have been smart to buy back shares" says Buffett. "I don't think that's true for many companies, though."
"Coke is probably the best large business in the world."
On buying back Berkshire shares (Buffett has never done it): "We've missed the boat at various times in regard to buying back shares." He has no plans to buy any back at their current price of about $70,000 per A share.
On technology: "I don't want to play a game where I feel other guys have an advantage. I would rather swing at easy pitches." Those easy pitches have been companies like Coca-Cola, Gillette, and Walt Disney.
On evaluating technology stocks: "If I were a business-school professor, as a final exam, I'd give the class an Internet company and ask them how much it's worth. Anyone who answered, I'd flunk."
On low-price stocks of Japanese multinationals: "We stay away from companies with low returns on equity. ROEs on Japanese equities are low."
On the market: "If stocks were cheaper, we'd be buying more of what we already own. We want things we can understand. That means good businesses run by people we're comfortable with."
On the game of bridge: "I play about 10 hours a week. I don't think it's hurt Berkshire Hathaway yet. If the market drops, I'll spend less time playing."
On the purchase of 130 million ounces of silver in the second half of last year: "It will have about as much impact on Berkshire Hathaway as Warren's bridge," joked Munger. "It shows the human personality at work -- a very peculiar personality."
On Berkshire's National Indemnity reinsurance business (industry prices have dropped substantially in the past two years): "We'll do far less catastrophe business in the next few years."
On spending to finance political campaigns: "I think the arms race in campaign spending by businesses has just begun. Political influence has been an underpriced product, and prices are going to go up. [Campaign finance reform] legislation is needed."
On how/when to sell stocks: "Buy things you never want to sell. If we need money for something, we'll trim some holdings. But the thing to do with great businesses is to hold on for dear life," says Buffett.
"Sell when you find something immensely better," added Munger.
By Andrew Osterland in Omaha, Neb.
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