2008年3月30日 星期日


Notes from the 2005 Berkshire Hathaway Annual Meeting

Berkshire 2005年年度股東會議記錄

Notes From The 2005 "Woodstock of Capitalists" Warren Buffett and Charlie Munger hold forth at Berkshire Hathaway's annual meetingTuesday, May 03, 2005
Berkshire 2005年年度股東會議記錄
2005年5月3日 星期二
Matt Stichnoth
mstichnoth@secondcurve.com More by This Author...

I spent this past Saturday in Omaha, Nebraska at Berkshire Hathaway’s annual meeting. In their traditional Q&A session with shareholders, CEO Warren Buffett and Vice Chairman Charlie Munger held forth on topics ranging from the state of the stock market, to education reform, to President Bush’s proposal to change Social Security. It was great stuff, as you can imagine. Here are my notes from the five-hour session:

Qwest Center, Omaha, Neb., April 30, 2005. The hall was full, with overflow rooms.
2005年4月30日,奧瑪哈 Qwest會議中心,大廳中人滿為患。

Buffett opened his remarks by announcing he would not discuss three topics: 1) Nebraska football, 2) What Berkshire is currently buying, and 3) Details of his testimony to regulators regarding the AIG probe. Reason for 3: investigators prefer witnesses not talk publicly about their testimony.

Q: What are the three most important criteria you use for selecting managers?

Warren Buffett: The most important characteristic is that a manager needs to have a passion for his business. When we buy a company, we are monetizing the owner for a lifetime’s worth of work. The individual is already wealthy; we are merely shifting the form of his wealth into something more liquid: cash. After the deal has closed, the seller’s motivation to come to work in the morning isn’t a paycheck. (For that matter, after the deal is done the sellers don’t have any need to work.) We don’t have any employment contracts at Berkshire. Once we buy a business, we do all we can to not extinguish the owner’s passion for the business. We only have 16 people working at headquarters, so there’s no one around who can go out and run a business if the management of one of our businesses leaves. We want to buy from a manager that loves the business, rather than the money.

After passion, the other important characteristics we look for is intelligence, energy, and integrity. That last, integrity, is important. If you’re dealing with someone who doesn’t have integrity, you’d better hope he’s dumb and lazy, too, or else you could be in real trouble.

Charlie Munger: Our system has worked wonderfully well. The only surprise is how few people copy it.

Q: How did you arrive at your decision to buy Anheuser-Busch? How long did the decision take?
問題:當初投資Anheuser-Busch的決策過程? 下這項決策花了多久的時間?

WB: The decision to buy the stock took about 2 seconds. I’ve been reading Anheuser-Busch annuals for 25 years. (I’ve owned 100 shares of the stock, as I have many other stocks, so I can get easy access to their annual reports.) Beer sales in the U.S. have been flat for several years. Wine and spirits have gained market share at the expense of beer. Miller has been rejuvenated to some degree, as well. So Anheuser has had to spend more lately to maintain market share, and has had to engage in promotional pricing. But the business is easy to understand, and Anheuser’s business in particular is still extremely strong. The story of the U.S. beer business over the past 50 years is fascinating. Right after World War II, Storr’s had over 50% of the market in Omaha. But the large, national players have steadily consolidated the business. In the 1970s, Schlitz was the biggest-selling brand nationally. The beer business won’t grow significantly in the U.S., but Bud’s popularity is growing worldwide. Bud will be strong. The company’s earnings won’t do much for some time—but that’s ok with us.

CM: Sometimes a company needs to go through a patch of unpleasantness, for an investor of our size, if we’re going to be able to buy at a good price.

WB: Also, beer doesn’t face any competition from private labels or generics. But per capita beer consumption is going nowhere.

CM: Decades ago there were hundreds of beer brands in the U.S. The trend for years has been to concentration.

Q: How is Berkshire positioned vs. other buyers of businesses, such as private equity investors and hedge funds? How can Berkshire be unique among buyers?
問題:Berkshire的定位與其他購併買家,如私募基金與避險基金投資人,有何不同? Berkshire如何在激烈的競爭中脫穎而出?

WB: There’s far more money today looking at deals, and that will pay up for good-but-mundane businesses, than five years ago. The situation has eased somewhat recently, but people were lined up to buy just about anything. You have private equity investors selling to other private equity investors, who plan on reselling the business again. Berkshire can’t compete there—but the situation won’t go on forever. Berkshire is not positioned favorably at all to compete with those bidders.

But things can change fast. There have been 3 or 4 times in my career when it looked like so much money was around that it would be impossible to ever do attractive deals or make attractive purchases again. I closed my partnership in 1969 for that reason. Within four years came the greatest buying opportunity of my lifetime. That’s happened several times. In 1998 there were incredible opportunities available. People were just as smart then and had just as much money, but the opportunities were there anyway. In 1998, off-run governments were yielding 30 basis points more than on the run government. Both were highly liquid. Both had zero default risk, yet there was a 30 basis point difference in yield for six months difference in maturity at the long end of the yield curve. It’s hard to believe that can happen, but it does.

The junk bond market is another good example of how quickly things can change. Here’s a chart of the peak yields of selected junk issues, their subsequent trough yields, and the number of months from peak to trough:

Issuer Highest Yield (%) Lowest Yield (%) Months from peak to trough

Williams 75.4 7.0 14
Dynegy 67.7 6.0 14
Qwest 54.1 8.5 14
Crown Cork & Seal 48.5 4.4 17
Nortel 44.3 5.4 13
CMS 42.7 4.1 13
ABB 33.7 4.7 13
Lucent 31.6 7.5 16
Source: Berkshire Hathaway

CM: Lots of the buying is fee-motivated. If your fee is a percentage of assets managed, it’s not hard to rationalize paying a higher price for a business. Howard Marks, who I believe is in the audience, actually sent some money back to his investors because he couldn’t find anywhere attractive to invest it. That’s the right way to behave if you’re investing on someone else’s behalf, but it’s not normal behavior.
曼格:許多交易背後的推手都是手續費考量,如果你支付的手續費係以管理的資產總額為基礎,那麼你就不難找到高價購併企業的理由,Howard Marks-我相信應該在座,也曾將部份資金退還給投資人,因為當時的他找不到任何適合的投資標的,我想如果你真的替設身處地替別人想,你就會這樣做,雖然現實社會中很少人會這樣做。

WB: Not long ago I got a call from a guy, whose name you would recognize, who was looking for some advice on a reinsurer he was looking at. He was desperate to make this investment, because if he didn’t do something by a certain deadline, he’d have to send the uninvested money back to his investors. So he was ready to buy a business he didn’t understand. Charlie and I are invested alongside you, so we have downside risk as well as the potential for upside. But the people who run the entities we’re bidding against don’t necessarily have the same downside. Competing now is tough. That said, we have one or two things that could happen that could involve real money.

CM: Our sellers tend to not want to sell to private equity funds or hedge funds—thank God.

WB: We haven’t seen any deals by others recently that we wish we had done.

Q: What advice would you give a young person who’s interested in investing?

WB: I got started when I was 7. I wasted my life before that. (That reminds me of what W.C. Fields said when he inherited some money: he spent half on whiskey and wasted the rest of it.). My father worked at Harris, Upham in Omaha. The stock market was open a half day on Saturday then, and I used to go down to his office Saturday mornings. I read a lot—everything I could find on investing and the stock market. When I was 11 I bought three shares of stock. Then I read Ben Graham when I was at Nebraska. My advice is to read everything in sight, and to start young. If you start young and read a lot, you’ll do well.

There are no secrets to investing that only some select priesthood knows. Successful investing requires a quality of temperament, not a high IQ. You need an IQ of 125, tops—anything more than that is wasted. But you do need a certain temperament, and must be able to think for yourself. Then constantly look for opportunities. You can learn every day. You can’t act every day, but you can learn every day. It’s like any game, if you enjoy playing it, you’ll do well. But start early, and follow a framework that’s been successful.

CM: Warren respects the investment process a lot more than I do. It really is a low calling, compared to other callings such as being a surgeon. I don’t like to see such a high percentage of GDP going into investment management, and I don’t like to see so much brainpower go into investment management. I hate the fact that we have played a role in that. Corporate CEOs would do well, though, to spend more time studying investing.

WB: That’s right. Managers could do better if they understood investing better. Very often a CEO will have someone else handle his personal money. But he’ll let a team of investment bankers waltz into the room and make a 2-hour presentation on some deal, and the CEO will then preside over some strategy committee that will decide whether to do the deal or not—yet this same CEO feels he’s not qualified to make his own investment decisions.

CM: The present era has no precedent for how much energy is being put into buying and selling activities. No past era has seen this much concentration of frenzied energy. It reminds me of Sodom and Gomorrah.

Q: What is your view on Petro-China?

WB: We bought Petro-China a few years ago after I read the company’s annual report. It’s the first Chinese stock we’ve owned, and the last, so far. The company produces 3% of the world’s oil, which is a lot of oil. It is 80% the size of ExxonMobil. Last year Petro-China earned $12 billion. Just 5 companies on the Fortune 500 made that much last year. When we bought the company, it had a market cap of $35 billion, so we ended up paying 3 times what the company earned last year. Petro-China doesn’t have a lot of leverage. It will pay out 45% of what it earns, so based on what we paid for the stock, we’re getting a 15% cash yield on our investment. The Chinese government owns 90% of the stock and we own 1%, so I like to joke that between the two of us, we control the company. Unfortunately, we had to disclose when we owned 10% of the non-government class of shares. We would have bought more, but the share price rose. Management does a good job running the company. Petro-China has 500,000 employees.

CM: It would be a nice life if opportunities like this happened all the time.

WB: Anyone could have read the Petro-China annual and saw what we saw. We never went to see the company before we invested. It was all right there, in black and white. I just sat in my office and read the report. At the time, Yukos was far better-known in the U.S. than Petro-China was. Given what’s going on in the two countries, you need to ask whether you’d rather own Russia or China. Petro-China was far cheaper than Yukos. And the economic climate is better in China than it is in Russia. If the company were trading at the same valuation as a U.S. oil company, that would be different.

Q: The prices of many raw materials are surging. If materials prices keep rising, will corporate margins be hurt?

WB: It depends on the business. Our carpet business has been very affected by rising oil prices. We have lagged being able to put through the hikes to our customers. We want to protect our retailers somewhat. Johns-Manville uses a lot of natural gas, so the rise of natural gas prices has hurt margins.

Businesses with strong positions tend to be able to pass through higher raw material costs, just as they can pass through higher personnel costs. Higher materials costs is really a form of tax, but on the consumer, not on the business. Corporate profitability as a percentage of GDP is at an all-time high right now, so it wouldn’t be surprising if that number were to fall. Notably, corporate taxes as a percentage of all taxes paid is at an all-time low.

CM: It’s hard to know which companies will be able to pass through higher costs—but it’s important to know.

WB: We like to buy businesses that we think have untapped pricing power. In 1972 when we were looking at See’s, we asked ourselves, if prices were raised by 10 cents per pound, would sales fall? We believed they would not. You’re not in a great business if you have to have long management discussions before you raise prices. The newspaper industry 30 years ago had a lock on advertisers’ business, because it owned the only megaphone in town that local advertisers could use to reach consumers. Rate hikes were a big yawn to most publishers. They didn’t care about alienating subscribers or advertisers. They raised prices when newsprint prices went up, and then raised prices when newsprint prices went down. Now publishers agonize over price increases. They don’t want to drive advertisers away to other media. And they don’t want to drive away readers; when they leave, they never come back. You can learn a lot about a business by the machinations it goes through to raise prices. It’s been tough to raise prices in the beer business lately, which is not a good economic sign.
巴菲特:我們喜歡買下具有超強價格控制能力的企業,1972年當我們正要買進喜斯糖果時,我們曾問自己,如果每磅的糖果價格調漲十美分,銷售量是否會因此下滑? 我們的答案是不會,如果每次調整價格都要瞻前顧後的話,這家公司肯定不算是好公司,就像新聞事業在三十年前的廣告業界獨領風騷,因為它是城市內惟一的傳聲筒,是廣告主與消費者溝通的唯一媒介,調漲報費對發行人來說不過是小事一樁,他們根本就不怕這樣做會得罪廣告主與讀者,只要印刷成本上漲就馬上反應,而印刷成本下滑時,卻也照漲不誤。不像現在的報紙,調漲價格根本就是不可能的事,他們深怕客戶會棄他們而去,選擇其他媒體,且往往從此一去不回,你可能從一家企業的調漲價格過程中學到許多,像啤酒業者最近要調價就面臨很多阻力,這實在不是一個好現象。

Q: Now that dividends receive favorable tax treatment, how do you feel about the possibility of declaring a dividend?

WB: Dividends are lightly taxed now. But as we’ve said in the past, event if dividends weren’t taxed at all, we wouldn’t pay a dividend. If we can retain a dollar and have it be worth more than that in present-value terms, we’ll hold that dollar. With as much cash as we have now, that’s not easy.

The burden of proof on the dividend issue may shift in a few years if things don’t change, though. As we get bigger, it could be that we should pay a dividend—maybe even a large one. So far, though, we feel our dividend policy has been right. But if we sit here a few years from now and still haven’t deployed our cash, the burden of proof will be on us.

Q: How far down do you think the dollar will go?

WB: The trade deficit is at $618 billion, and the current account deficit is also huge. As big as the U.S. is, something could happen in a big way to get things back in balance. Some economists say that a soft landing is likely. I don’t know how that is. I don’t know why or how the numbers will come down, but they will. The U.S. is transferring its wealth abroad. Paul Volcker recently expressed some apprehension in an op-ed piece in the Washington Post. Volcker is not sure that they’ll be a soft landing.
巴菲特:目前的貿易赤字高達6,180億美元,同時經常帳赤字也高掛,然而像美國這樣龐大的經濟體,總是須要一段很長的時間才能回正,有些經濟學家認為有可能軟著陸,我不知道如何做到,但我相信最後一定會,美國正把其財富不斷地往外送,前美國聯準會主席Paul Volcker最近就在華盛頓郵報發表一篇社論公開表達憂慮,Volcker就不確定軟著陸一定會發生。

There’s a very high percentage of capital now that’s on a hair trigger. Some is invested in the carry trade, some in bonds, and some in stocks. Something is going to happen to make all those investors change their minds at once. The size of this “electronic herd” is at an all-time high. Some exogenous event, a la an LTCM, could cause a stampede.

If you are the rest of the world, you can’t get rid of your dollars; you can’t have everyone head for the doors at once. Predicting the timing of a future economic event is not easy. Predicting what will happen is easier, though.

CM: I’m more repelled by the lack of virtue in how people use consumer credit. I differ with Warren on the dollar somewhat. A great civilization has a lot of ruin in it. Are there dangers in the current situation? Yes. But I believe the system can stand a lot more abuse.
曼格:我倒是比較厭惡現在的人毫無節制地使用消費性貸款,關於美元,我的看法跟巴菲特有點不同,一個偉大的文明,難免有些藏污納垢的地方,這些危機是否會引發崩潰? 有可能,但我認為目前這系統還能再撐一陣子。

WB: The U.S. is an incredibly huge, rich country. Suppose it were a farm that were so vast that its owners (us) couldn’t travel to its outer reaches. Assume that each year, we consumed 6% more than the farm produces, and paid the difference by selling off, or mortgaging, little pieces of the farm. We can’t even see what we’ve sold, since the farm’s so big, that we don’t even feel it. The rest of the world is happy to take a little piece of our farm. That’s been going on for awhile, and has accelerated.

That can go on a long time, and eventually the world will own a big part of the U.S. We send $2 billion abroad daily.

CM: This doesn’t bother me as much as it does Warren. What does it matter if foreigners own 10% of the U.S., if the wealth of the U.S. is 30% higher?

WB: There’s a difference between wealth and one’s place in the world. Suppose that, instead of fighting the Revolutionary War, we agreed to give the British 3% to 5% of our national product every year, and in return they agreed to leave us alone. I don’t know how long Americans would put up with that before they demanded outright independence and an end to the payments. The U.S. is paying tribute to the rest of the world. It’s not a stable situation. Berkshire currently owns $21 billion in foreign currency contracts.

Q: What would happen to Berkshire if the housing market declines?

WB: A decline in the housing market would hurt certain of our businesses, such as carpets, but those reversals would be made up for elsewhere. If there is a bubble, and it’s pricked, we’d feel it in some of our operating businesses. But we’d also likely see an increase in investment opportunities. I’m generally not big on making macro calls (our foreign exchange bet notwithstanding); it’s better to invest company by company, as we have with Petro-China. The current state of the housing market brings to mind what happened 25 years ago in farmland in Nebraska. Land was selling at $2,000 an acre, that could be bought a few years later at $600 per acre from the FDIC. The thinking during the farmland boom was that cash was trash. Inflation was high. A lot of banks, some of which had survived the depression, failed. People go crazy in economics periodically.

Residential housing is a bit different from farmland, of course. People live in houses, so that the investment isn’t purely economic. But I’m not sure why prices should be expected to rise faster than construction costs over a long period.

CM: There’s a real estate asset price bubble going in places like Laguna, Calif. and Washington, DC. A very ordinary oceanfront house in Laguna sold for $3.5 million. Figure $500,000 for construction costs; that means that the land sold for $3 million. Granted, it was an oceanfront property, and so relatively scarce. Still, the plot size was just under an eighth of an acre, which means that the land underneath a modest oceanfront house sells for around $27 million an acre.
曼格:在加州的Laguna以及華盛頓特區確實存在著房地產泡沫的情況,在Laguna一棟非常普通的房子就因為靠海可能要價350萬美元,若以50萬的建築成本計算,這代表土地要價300萬美元,好! 就算是因為它臨近海邊,但其面積只不過1/8英畝,換算一英畝臨近海邊土地的價格高達2,700萬美元。

WB: At $27 million an acre I’d rather stare at the bathtub.
巴菲特:一英畝2,700萬美元? 我寧可待在家裡泡浴缸。

Q: How do you manage the correlation of risks among Gen Re, National Indemnity, and Berkshire’s other businesses?

WB: One of my main jobs is to manage the risk among our insurance companies. If we get an earthquake in the wrong place, many of our businesses could be affected, including See’s, Wells Fargo, National Indemnity, and General Re, all at once.

When there’s trouble, everything correlates. The most likely mega-cat we face is a hurricane. It could be a $25 billion-$100 billion event. An earthquake can be just as bad as a hurricane. My job is to know the worst case. What happens if a Force 5 hurricane travels up the East Coast? A hurricane hit Long Island in the 1930s. It was just potato fields then, but there’s a huge amount of insured exposure there now. Everything that can happen will happen. There were three earthquakes of 8.0 or higher in New Madrid, Mo. There was a severe earthquake in South Carolina. Extraordinary things can happen. Hurricanes and earthquakes are the biggest risks. We’ve gotten rid of all our nuclear, biological, and chemical exposure.
一旦意外發生,所有事情都會相互牽連,最有可能發生的超級大災難就屬颶風,損失有可能高達250億到1,000億美元,地震引發的損失也不惶多讓,我的工作就是預先設想最壞的狀況,萬一五級超強颶風侵襲東部時會怎樣? 1930年就曾有颶風席捲長島地區,當時那個地方還只種滿馬鈴薯,但現在卻有成千上萬的投保標的物,任何事情都可能發生,只是時間早晚而已,新馬德里就曾經發生過三次八級以上的大地震,南卡羅萊納也曾發生嚴重的大地震,颶風與地震是我們的天敵,至於核生化的風險則已完全被我們排除在理賠範圍之外。

We wrote a policy to insure a large international airport to cover $500 million in excess of $2.5 billion, excluding NBC. Only $1.6 billion counts toward business interruption—that would take years to accumulate. So there needs to be $900 million in physical damage before we pay anything. We wrote a policy on the Final Four, and would have paid $75 million if the event were cancelled. Not postponed—canceled. We wrote a similar policy on the Grammys. We’re willing to lose a lot of money in one day on transactions such as this. If we didn’t exclude NBC, we would run the risk of extinction as a company. We will write NBC coverage under certain circumstances and under certain restrictions.

CM: We care a lot about these sorts of risk. A tsunami has never hit California, but there’s no reason one might not. So we think a lot about it. I don’t know of any company that has as much NBC exclusions as we do. We worry more about the downside. It’s Armageddon around here very day. We don’t like losing money.

WB: I don’t like the idea of risking what you need for the sake of getting what you don’t need. I have a 98-year-old aunt who has everything invested in Berkshire stock. Maybe if we charged 2 and 20, I’d feel differently.

Q: What are your thoughts on education reform?

WB: The public education system in this country is dreadful. Like virginity, a good school system is not easily restored. Next to the nuclear threat, it is our number-one problem. I don’t like the idea of a two-tiered school system, one private, one public. I don’t care about the quality of the public golf courses in Omaha, because I play on a private course. Same thing in education: if the wealthiest and most privileged families send their children to private school, they won’t care about the public schools and the public schools will suffer.

CM: I was talking to a guy whose wife is a public school teacher, and he said that she records the books for the kids who can’t read them, so the kids can take part in the discussion of what happened in the stories. That’s a failure. The erosion of the public schools never should have been allowed to happen.

WB: In the U.S. everyone should have equality of opportunity. You can’t have that if the richest and most privileged kids go to private schools, while other, less privileged kids go to armed camps.

Q: How will the shift in mortgage lending to more 0%-down mortgages affect the overall savings rate?

WB: Any house represents savings. Home construction comes about through savings. Lending terms have gotten easier as prices have risen. That’s the opposite of normal. Mortgages are now intermediated; the buyer of the mortgage doesn’t need to look at the particulars of the individual borrower. It just cares about the guarantee. . During the farm bubble in small towns, things got crazy. People began to say that farmland was an appreciation investment, not an income investment. It was just a form of the greater fool theory, and is nothing that banks should engage in. Right now, the rest of the world is our savior in providing credit.

CM: It’s obvious that easy lending on houses causes prices to rise, and new houses to be built. Eventually, this will cause prices to decline.

WB: Suppose for a minute that Omaha were static, with no births or deaths, and no net migration, and that every year everyone sold his house to someone else in the community. In the first year the price might be $100,000, then the next year it’s $150,000. There’s no net change in wealth. This kind of thing happens in the economy as a whole; people stop thinking and just depend on the guarantee. There are these kinds of “buried Ponzi effects” in any economy that are little studied.

Q: Can gold be a good substitute for a paper currency?

WB: I’m not crazy about gold as a hard asset, compared to, say, oil, See’s candies, or Coke. If the value of the dollar dropped by half, we’d sell See’s chocolates at twice the price. I prefer hard assets that are useful. I wouldn’t trade ownership of See’s for a hunk of yellow metal that has little use. When I was a boy we all used to get lectures from my father at the dinner table about the virtues of gold. Gold sold for $35 an ounce in 1940, and it sells for around $400 an ounce now. That’s not a very good return, especially when you consider the cost along the way of storage and insurance.

Q: What are your greatest fears?

WB: I don’t worry about the economics of our businesses. I do worry about something going wrong at our businesses, a la Salomon. We have a lot of employees, and it’s a sure thing that at any given moment, someone might be doing something wrong. So we try to have a culture that minimizes the urge to cut corners. If I get on a NetJets jet and am running late, I’m not going to tell the pilot that it would be great if he could hurry. I want him to go by the book.

Companies tell people to do bad things all the time via their compensation schemes. It’s a bad idea to have making quarterly numbers as an incentive. I don’t know what our quarterly results will be. We have $45 billion in loss reserves; is that the right number? Who knows? It could just as easily be $44.75 billion. That extra $250 million could be used to “make” a quarter. My managers don’t have pre-set budgets to meet. I don’t even see their budgets. If we don’t make an adequate return it’s my fault; the problem would be deploying capital.
當績效制度設計不當時,公司往往間接促使員工做壞事,像我認為以季為基礎計算績效就是一個很不好的制度,我從來不知道我們的季目標為何,我們帳上有高達450億美元的損失準備,這個數字對嗎? 會不會太多或太少? 誰知道? 或許有可能是447.5億美元,這樣我們2.5億美元的單季業績便可輕易達成,我們的經理人從來沒有預先設定的預算要達成,我甚至沒看過他們的預算,如果我們沒有獲得合理的報酬,那就是我的錯,問題出在資金是否運用得當。

CM: It’s bad when headquarters says that earnings must go up regularly. That’s not the kissing cousin of evil—it’s the blood brother of evil. In business, earnings don’t always go up regularly. It’s not just compensation that makes people do bad things. Sometimes, people just don’t want to make the boss look bad, if he’s enunciated a certain earnings goal. You don’t want to set up a system that exerts financial or psychological pressure on people to do things that they know they shouldn’t do.

Q: You said in your annual letter that business ability is largely innate. How can you evaluate that ability in the absence of a track record?

WB: We’re lucky, because we’ve bought businesses run by people who have demonstrable track records. But if I go visit a class of 50 MBA students, I can’t rank them ahead of time by who’ll be most successful. It’s tough to go out to the practice tee and tell who the scratch golfers are just by looking at their swings. We look at people who have long track records, and we assume that they won’t screw up in the future. \

What’s the best indicator of future success? How early in life you start your own business. A lot of success is based on your wiring—and a lot is based on how you work with the wiring you have. At Berkshire, our managers tend to have the right wiring. Some of them never say anything dumb about business. It’s wiring, and it’s temperament. You want to bet on those people. Since my dad wouldn’t let me be a bookmaker, I went into investing.
什麼是未來成功的最佳保證? 那要看你何時開始開創事業,許多成功是基於你的架構,或者說你是如何運用你所建立的架構,在Berkshire,我們的經理人都有正確的觀念,他們很少會出差錯,這是觀念與態度問題,如果你要壓寶在這些人身上。因為我父親反對我成為出版業者,所以我改行做投資。

Q: How happy are you about Cologne Re? You used to own 80% of company, via Gen Re. Now you’re up to 91%.
問題:你對科隆再保為何特別偏愛? 透過通用再保,你本來只持有該公司80%的股份,現在為何提高到91%?

WB: It’s not a pressing issue. We have bought some additional shares, but there’s no particular reason why we should bring it up to 100%.

Q: What’s going to happen to the regulatory environment for Fannie and Freddie?

WB: The GSEs have expanded their original reason for being. At first, they were just supposed to guarantee mortgages, like the FHA and VA. That allowed lenders to make loans on properties that were far away. This helped make the mortgage market more efficient. When I got my first mortgage, I went down to see Mr. Brownley at the Occidental Building and Loan. He knew me, he knew my family, and he knew the property I wanted to buy.

Then the GSEs expanded from guaranteeing mortgages to investing in them. They could earn high returns doing this because they were viewed as government agencies, and so could lever up. Fannie and Freddie are big users of the carry trade. But they got carried away when they promised a certain, high rate of earnings growth. You can’t guarantee steady earnings growth with a carry-trade operation, because you can’t always match your assets to your liabilities. You can hedge, but the hedge won’t be perfect. The only way Fannie and Freddie could perfectly match their assets and liabilities would be if they could sell callable 30-year bonds—but they can’t do that because no one would buy them.

They built these huge portfolios using accounting shenanigans. It boggles the mind. Now the government will be on the hook if something goes wrong. There’s going to be a huge fight about how Fannie and Freddie should be reined in. The companies used to have (and still have) a lot of clout in Congress. The mess is the consequence if issuing a blank check to a company that promises it’s going to grow at a mid-teens rate. The government can’t tell them to get rid of their portfolios—the portfolios are too large. Maybe it can impose some portfolio limits. Fannie and Freddie have acted like the two biggest hedge funds in history.

There won’t be any shortage of buyers if Fannie and Freddie had to shrink their portfolios. It wouldn’t be the end of the world if the companies had to cut back on their purchases.

CM: A lot of the companies’ troubles came about from derivatives and silver-tongued salesmanship.

WB: How can you have a $5 billion mis-mark at one company, and a $9 billion mis-mark at the other? We’re a long way from Jimmy Stewart.

Q: Why hasn’t Berkshire invested more in Europe and the UK—particularly since you’re so negative on the dollar?

WB: We own a large electric utility business in the UK, via Mid-America Energy. One problem in the UK is that investors need to disclose their holdings once they get to 3%. So if we’re looking at a company with a £5 billion market cap, we’d have to disclose once our stake got to be £150 million. We have owned Guinness, now part of Diageo. But we do think twice, because of that 3% requirement. It’s a deterrent, but not an overwhelming deterrent. We would feel comfortable with a lot of UK businesses.

CM: It’s an odd occurrence that we own socialized currencies vs. the dollar.

WB: Europe and the UK are slow-growing, but that’s largely because their populations aren’t growing. If you look at GDP growth per capita, the difference in growth rates between Europe and the U.S. isn’t that wide.

Q: Should a U.S. business owner be concerned about the declining dollar?

WB: It’s tough for individuals to invest in foreign currencies. Better to invest in your own abilities. Anything you do to develop your own abilities and your business will be more productive than worrying about foreign exchange rates. If you own a good business in the U.S., you’ll do ok.

CM: Berkshire doesn’t do much asset allocation. We don’t want to have our search constrained by pre-set limits. On this issue, we are out of step with modern investment management. That’s ok—they’re wrong. We could’ve owned $30 billion in junk bonds if the market hadn’t gone up so quickly. I’m a big believer in the saying that “If it’s not worth doing at all, then it’s not worth doing well.”

Q: If the dollar continues to fall, how much do you think that the resulting inflationary tendencies could affect Berkshire’s businesses?

WB: Inflation destroys value, but unequally. The best businesses don’t require much in the way of new investment. Airlines have been hurt the most. They have to keep buying new airplanes, and maintaining the ones they own. That means they’re investing more and more dollars that will fall in value. People such as brain surgeons and lawyers aren’t as hurt by inflation. They bought their degrees and training years ago, and don’t need to do much reinvesting. They’ll maintain their earnings power regardless of what happens to inflation.

We’re always suspicious that inflation will come back. That deflation talk a few years ago was nonsense. The trade picture should exacerbate inflation: inflation of oil in euro terms isn’t as severe as it is in dollar terms.

It’s a concern, but not an overwhelming one. See’s has done well during periods of inflation. Public utilities demand more and more investment; the rate of return on that investment needs to be ok.

It’s not clear that the dollar’s weakness will be particularly inflationary. The factors that have helped bring the dollar down, such as the emergence of low-cost manufacturers overseas, tend to restrain inflation.

Q: What is your strategy if the market gets dismal?

WB: If the market gets cheaper, we’ll have opportunities. We’ll be buying as prices drop. I am always looking to buy stocks, just as I buy groceries every week. I prefer lower grocery prices. We spend no time trying to forecast what the market will do. We don’t know which way it’s headed. We do know sometimes that we are getting great value for our money. There’s always a list of reasons why the country will have problems. I’m a big bull on this country. It’s the most remarkable success story in the history of the world. There were 4 million people in the U.S. in 1790, who were no smarter than the people in Europe and China, both of which had far bigger populations.

CM: The economics of the country will continue to improve, but we may be at or near the apex of a great civilization.

WB: People pass up attractive opportunities because they get wrapped up in a single statistic. It’s crazy to say that I’ll wait a year because it will get cheaper due to a macro factor.

Q: What will happen to GM and Ford? Is asbestos reform coming?
問題:通用跟福特會變如何? 石棉案改革是否有望?

WB: Rick Wagoner and Bill Ford have been handed tough hands to play. It’s not a consequence of anything they did. Their companies’ legacy cost structures from decades ago make it tough to compete. Imagine if they signed a contract to pay more for steel. People would know that’s untenable. But GM and Ford must pay large sums in annuity and health care costs compared to their competitors. Competitors pay the same amount for rubber and steel. Some of those contracts go back to when GM had 50% market share. I’m not sure what I would do if I were CEO. If you look at GM, the company has a $15 billion market cap, and a pension fund obligation of $90 billion. So that’s $90 billion for workers, compared to $15 billion for the owners. If the company had a steel contract and was paying $200 per ton more for steel than its competitors, it would be obvious that the company was at a severe disadvantage. But when the companies signed these labor contracts, they didn’t need to account for pension obligations. Companies didn’t have to accrue for pensions until the 1960s, and didn’t have to accrue for healthcare obligations until the 1990s. So it’s important to keep in mind the economic effects, not just the accounting effects.
巴菲特:Rick Wagoner 跟 Bill Ford都接下別人的燙手山竽,他們兩人並非是始作蛹者,以前遺留下來的高成本結構大大削弱其競爭力,舉例來說,如果他們採購鋼鐵的合約訂價比別人高,大家一定會說這樣行不通,同樣的通用跟福特必須付出比同業更高昂的退休金與健保成本,至於鋼鐵與橡膠的成本大家相差有限,即便當時通用的市佔率高達五成以上,我不知道當時的總裁在想什麼,看看現在的通用,市值雖有150億美元,但卻背負900億美元的退休金負債,負債的金額遠超過股東權益,如果你發現某家公司的鋼鐵採購成本每噸比同業多出200美元的話,你就知道情況不妙了,但當年公司簽下聘雇契約時,帳上卻不必認列退休金的負債,依照會計原則,公司從1960年代開始才須認列退休金的負債,至於健保成本則遲至1990年才開始認列,所以大家一定要謹計,除了會計數字之外,經濟實質更是重要。

CM: Warren gave an optimistic prognosis. If you jump out the window on the 42nd, you’re kidding yourself if you think everything’s ok at the 20th floor. The president or governor of Michigan should address this issue now.

Q: Is asbestos reform coming?

CM: The asbestos problem has come about as a result of terrible behavior by lying doctors and lawyers, and gutless behavior by courts and politicians.

There was huge fraud in the workman’s comp system in California. It got so bad that it affected employment, so eventually changes were made that helped ease the problem. If the asbestos problem gets bad enough, there could be more protections. But once you get a powerful political force like this, even judges will go along. Luckily asbestos isn’t in use anymore, so the problem will eventually go away. But the behavior has been terrible.

Q: What advice would you give your successor in managing a diverse business?

WB: We rail against acquisitions at other companies—but we do it, too. Our motivations are different from most other acquirers. We’ve created climate that lets people keep running their businesses with the same passion they had when they owned them. Gillette bought a bunch of businesses years ago. So did Coke and Philip Morris. Most acquisitions didn’t turn out so well. Those acquirers thought they could run the businesses they bought. Charlie and I know we can’t. There are no group VPs in Omaha, no directives going out, no new way of doing things. There are no layers of HR, legal, and so forth. Those things destroy the incentive of people who have gotten rich to stick around. This makes Berkshire a good place to work.

CM: A lot of our success stems from our lack of oversight. Our successor will continue that lack of oversight.

WB: This is very different from GE’s system. It’s very simple. Our big worry is that the culture gets tampered with. But it should work for a very, very long time. Which is why all my stock will go to the foundation.

Q: What’s been your best investment?

WB: See’s was hugely important. It taught us a lot, and generated cash we could use to buy more. We bought the first half of GEICO for $40 million. (The second half cost $2 billion.) Some businesses have good growth potential. Others don’t, but generate a lot of cash. We can move capital among various options. GEICO still has a lot of growth opportunities.

Rule #1: Don’t run up charge card debt. That’s the first thing I tell students when I talk to them, and I tell them that if you remember nothing else, remember that.

CM: The best investment we ever made could be the search fee we paid to find Ajit Jain. Getting the right people is more important than getting the right business.
曼格:我們最好的一次投資,應該要算是當初付給人力仲介找到Ajit Jain的那筆佣金,找到對的人比找到對的企業還重要得多。

Q: What do you think about what’s going on at the NYSE?

WB: It would be better if the NYSE stayed as a non-profit institution. It has done a good job over two centuries. The enemy of investment performance is activity. I don’t think the exchange should encourage more activity. There may be all kinds of reasons to become a for-profit entity. But investors won’t be better off if volume increases. Transactions are a frictional cost of capitalism. But IBM and GM won’t be any more profitable if their share bases turn over more often.

CM: I agree with everything Warren said, only more so. We have lost our way, when the directors and CEO of a venerable institution such as the NYSE fail to act as exemplars. They have a duty to act properly, and to create the right appearances. Teachers shouldn’t be fornicating on the floor, or drinking beer in class. And the people who run the exchange shouldn’t turn the stock exchange into a casino. It should be a public institution that’s an exemplar.

Q: What do you think about President Bush’s proposal to reform Social Security?

WB: Social Security was introduced in 1936-37. It was proposed as an insurance program as a way to get it passed. Transfer payments didn’t fly then. But Social Security is a transfer of wealth from productive people to non-productive people. I believe that anything that reduces Social Security payments below their current levels is a mistake.

Not everyone is wired the same way. Someone with an 85 IQ won’t do as well as someone who’s a genius. The Social Security system provides a minimum level of benefit to everyone, as long as they’ve worked.

There are a lot of ways to save, such as 401ks and IRAs. The way I’m wired, I wouldn’t have done as well if I’d been born in Bangladesh. People who’ve done well have an obligation to help those who haven’t. One thing to do would be to raise the payroll tax cap from $90,000. I wouldn’t want to do anything that might hurt the bottom 20%-30%. I don’t understand why the administration worries about the size of the deficit on 25 years when it doesn’t seem to care much about the size of the deficit now. If nothing is done to the system, the percentage of GDP devoted to Social Security will rise from 4.5% now to 6%. That doesn’t seem so bad. If it were up to me, I’d means-test benefits, lift the cap on the payroll tax, and raise the retirement age.

CM: I’m the Republican on the stage, and I think the Republicans are out of their minds to take on this issue. If the country is going to get richer, this will not turn into a huge problem. As more people retire, more of a share of GDP should go to Social Security. If funding gets tight, we can add some consumption taxes to make up the difference. Social Security is a very successful program. It is a reward for work. There’s hardly any fraud. It is a very capitalistic institution that has had good effects. All this talk to change it is twaddle.

Q: How can one invest with confidence in financial institutions when even the AAA-rated ones come under attack?

WB: Financial companies are tougher to evaluate than many other kinds of companies. Loss reserves can vary all over the place. We have $45 billion in reserves. Is that too high or too low? Who knows? It could easily be $44.5 billion or $45.5 billion. At banks, are the loans on the books any good? Who knows? In the brick business or candy business, you know your level at profitability at the time of sale, and can’t fool anybody. With financial services companies, it’s tougher. Then there are derivatives, which add a whole new level of complexity, risk, and opacity.
巴菲特:金融類股要比其它產業要難分析的多,損失準備的提列方式可能南轅北轍,就像我們帳上提列的450億美元損失準備,到底是高還是低,誰知道,它有可能應該是445億或是455億美元,另外以銀行業來說,到底帳上的貸款是不是呆帳? 誰知道,換作是磚塊或巧克力產業,在銷售之後,你就知道獲利是多少,而且很難騙得了人,但換作金融產業,就很難講了,何況還有衍生性金融商品,使得整件事變得更複雜、風險更高、透明度越低。

Fannie’s earnings were off by $9 billion from what the company originally said. Freddie’s were off by $5 billion. People weren’t necessarily negligent. It’s just hard to estimate. A lot of relatively small assumptions go into the numbers. If you change one even slightly, it could have a big effect on the bottom line.

At Salomon, Charlie was on the audit committee. People weren’t crooks, but it gets hard as you pile up the assumptions. Asbestos estimates are another thing.

CM: Completely by its nature, the industry makes it easy to make mistakes or commit fraud. It’s part of the business. If you sell gas, you get a greater risk of explosions. In financial services, it’s this.
曼格:這完全是制度本質使然,這個行業讓你很容易犯錯或是犯罪,這是這個行業的常態,就像你開瓦斯行,發生爆炸的機率本來就比較高, 金融產業也是如此。

Q: You liquidated everything in 1969. In 2000 you said the market was going nowhere, at best. Why didn’t you liquidate then?

WB: We own some securities that we wouldn’t buy at these prices. We’re not unhappy with anything we own. Part of it has to do with quantity. If we owned just 100 shares, that would be different. Plus, there are transaction costs and taxes. Basically, we like the businesses we own. We may not want to buy more here. But stocks as a percentage of our total assets is pretty low right now, historically. We’re not unhappy with Coke, Wells Fargo, and Moody’s right now. There’s not as much silliness in the market now as there was five years ago.

CM: If you make a list of the 4 or 5 most recent things we’ve done in the stock market, our record is like it was when we could move around with smaller amounts of capital. But as we got bigger it got tougher. I don’t think that’s a permanent state of affairs, but it’s not going away, either. Better small than nil—small is still big money.

Q: Don’t you think you have an obligation to have a position in gold?

WB: Gold is way down on my list as a preferred store of value. I’d prefer to own 100 acres of land in Nebraska, or an apartment house, or an index. We talked about gold being worth $35 an ounce in 1940—only its price was fixed then. If you go back to 1900, gold sold for $20 an ounce, and has risen to just $400 since then. And a holder would have to pay for insurance and storage. The Dow, by comparison, was at 60 or so in 1900; it’s now around 10,000—and has paid dividends along the way. Gold is just about the last thing we’d want to own. Other alternatives have utility, which gives them value. I’d rather have the ability to sell a pound of candy 20 years from now. I don’t see gold as a good store of value. About 3,000 to 4,000 ounces get taken out of the ground every year, and some amount gets reburied in the New York Fed. In between, gold doesn’t have much use.

CM: Gold had great utility, in the form of portability, to Jewish families in Vienna in 1935.

Q: What are your economic and stock market forecasts?

WB: At extremes, I can make market calls, which is what I did in 1969 and 1974. Investors will get more for their money now than they did in 1999—the year I gave a bearish talk in Sun Valley that later became the basis of an article in Fortune. If people have the choice of owning just bonds yielding 4.5% or owning equities for the next 20 years, they should own equities. But if people think they can earn double-digit annual returns, they are kidding themselves. Stocks should generate average annual returns of 6%-7%.
巴菲特:最誇張的時候,我還可以發出市場警訊,就像我在1969年跟1974年一樣,投資人現在投資可以比1999年還獲得更多,當年我在Sun Valley發表對股市看空的看法,後來還刊登在財富雜誌之上,如果往後20年內,人們在每年獲得4.5%固定報酬的債券與股票之間做選擇,他們應該選股票,但如果大家認為這樣就可以獲得10%以上的利潤時,可能就要失望了,股票的投資報酬率頂多介於6%到7%之間。

We’re not at bubble-type valuations anymore, but we’re not at bargain valuations, either. But we’ll likely get a chance to do something more screamingly intelligent in a few years.

Q: Why doesn’t Berkshire invest in commercial real estate?

CM: We are tax disadvantaged vs. individuals and REITs. Also, right now many properties have bubble-type valuations. All my rich friends have been selling their worst properties at high prices. When Nasdaq hit a high, REITs were cheap. They were selling at discounts to the value of their properties. Now REITs are unattractive. Property valuations are high, and REITs themselves trade at premiums to them. Plus, REITs have phony accounting.

Q: Is the U.S. a castle with a moat?

WB: The U.S. has done well over the past 215 years. We’re not an economic castle. The rest of the world is catching up. Our castle will grow in size, and there will be more castles in addition to ours. The more trade we have, the better. Prosperity won’t come at the expense of the world. There are 6 billion people in the world, a lot of whom don’t live well.

CM: If we’re in third place 50 years from now, we’ll still be rich, but it will be an odd kind of richness. Asia is likely to do the best.

What do you think? Let me know!

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