2015 marks 50 years since Warren Buffett took the helm at Berkshire Hathaway and the roughly 40,000 attendees at this year’s annual meeting were in a celebratory mood. The morning began, as usual, with a video. The highlight of this year’s production was a hilarious bit featuring Warren Buffett as the Berkshire Bomber facing off in a grudge match against welterweight boxing champion Floyd Mayweather.
With the video feature concluded Warren Buffett and Charlie Munger took the stage for the main event, their annual question and answer session. The Q&A was, as always, wide ranging and included audience questions from natives of Germany, Taiwan, China, Korea, and a seventh grader from Florida.
There was much well deserved praise for Mr. Buffett and Mr. Munger on their remarkable longevity and success running Berkshire, and the role of Berkshire’s corporate culture in creating and maintaining its success was a thread that ran throughout the Q&A session. Choosing carefully those you associate with, nurturing your reputation and setting the proper tone at the top were all offered as key components for anyone seeking to create and sustain an enduring corporate culture. They emphasized that Berkshire’s culture was not created overnight and that good fortune and being ready and open to opportunities when they were presented were also important parts of their success at Berkshire.
Not every questioner heaped praise on Berkshire. The morning’s first question was probably the most pointed. A shareholder asked Mr. Buffett to defend mortgage lending practices at Berkshire’s manufactured home subsidiary Clayton Homes. Mr. Buffett, clearly anticipating a question on Clayton, offered a well-documented and persuasive defense of Clayton and its lending practices, pointing out that 97% of Clayton’s borrowers successfully pay off their mortgages and concluding that “Clayton has behaved very well.”
The same shareholder also questioned Berkshire’s association with buyout firm 3G Capital which has a reputation for cutting jobs at the companies it acquires. With respect to 3G, Mr. Buffett remarked, and Mr. Munger seconded, that some of the companies it acquired had too many employees to work efficiently and that no one is required or expected to retain more people than needed to run a business. He added that after being acquired by 3G, performance at those companies improved considerably.
Succession, which has been a frequent topic at Berkshire meetings in recent years, was discussed only briefly this year with Mr. Buffett stating his belief the person at the top must have extensive operational experience, not simply investing prowess.
On stock valuations Mr. Buffett was asked whether he felt that the ratio of total market capitalization to GDP, one of his favored market valuation metrics, was now too high. He responded that in the current environment of exceptionally low interest rates current valuations were very reasonable.
They also remarked that the reinsurance business, where Berkshire is a major player, is not the attractive business it once was as competition has grown and made pricing unattractive.
Responding to a question about China and whether the principles of value investing have applicability there, Mr. Buffett and Mr. Munger agreed that the principles of value investing know no borders. They added that China could benefit from shifting toward a more value-oriented approach to investing and away from the speculative fevers that tend to dominate markets in China today.
Turning to China again, both Mr. Buffett and Mr. Munger expressed admiration for the speed with which China has transformed itself over the past four decades and agreed that China and the U.S. must find a way to cooperate over the long term for their mutual benefit and for the benefit of world.
On the acquisition front, both expressed interest in doing more deals in Europe, having recently closed on the acquisition of a German motorcycle equipment retailer.
As the Q&A wound to a close Mr. Munger offered a fitting conclusion, saying that simply being a shrewd investor, passively holding stocks, is not enough to make a life satisfying and that we all should strive to contribute more.