Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.
~ Warren Buffett
These famous words of Warren Buffett come to mind when the David Sokol scandal first surfaced. Has the Sage of Omaha eaten his words? It is therefore no surprise that Warren Buffett choose to start the Q & A session explaining the circumstances that led to the Lubrizol purchase.
This is the only part of the meeting that was fully transcribed so I won’t repeat it here. You can read it (and the audit committee report) here:
Based on his reply, I believe Warren has acquitted himself well.
How the question and answer session is conducted is that shareholders will take turns with three journalists in asking Warren Buffett questions. The questions asked by the journalists are pre-selected from the thousands sent to them. After Warren has given his answer to his question, he will turn to his partner, Charlie Munger, for additional comments.
Charlie will then give his inputs or say “I have nothing to add” if he has nothing to say.
Both Warren and Charlie would not have seen any of the questions beforehand.
Having done this for years, the two of them have a lot of chemistry and will usually insert some friendly banter into the process.
Here are some points from the session:
On investing in China or other countries outside US
Being unfamiliar with the culture, law and other areas of a country would affect his evaluation of the business. A greater margin of safety would have to be factored in compared to investing in a company in US.
On Whether it is a good time to invest in Oil
Warren has no clue in the direction of the price of oil and currently does not have directional trades in them (other than positions taken by some of his subsidiaries in their ordinary course of business).
On Too Big to Fail
Rules should be in place so that if companies that are too big to fail needed to be bailed out using taxpayers money, the CEO and spouse should be left dead broke. Other chief officers and directors should also face severe consequences. The current system where everyone enjoys the upside but none or very little of the downside does not serve any kind of deterrent.
On the Kinds of Business to Invest in during an Inflationary Environment
Companies that do not require much capital spending and has strong pricing power would be preferred. For example, See’s Candy was doing about $25 million in sales on 16 million pounds of candy with $9 million in tangible assets (when Berkshire first bought it). Now, it has $40 million in assets, does $300 million of sales on 30 million pounds of candy.
Industries like utilities will not do so well.
On Investing in Gold
Warren will rather invest in a good business than gold. Take all the gold in the world and you can put it into a cube that is 67 feet on one side. You can touch or fondle it but it won’t produce anything for you. You are hoping that someone else in a year or five years will come along to pay you more for it.
That amount of money can be better used to buy many notable businesses and generate regular earnings.
On Currency Investing
Any currency related investment is a bet on how the government would behave. Warren doesn’t really has any currency positions at this point in time. However, there is no question that the dollar will decline over time. The problem is that other currencies will also be doing the same, so it is a matter of which one is going to decline at a faster rate.
On Keeping Cash
All Berkshire’s spare cash are parked in US treasuries. Warren does not invest them into money market instruments or commercial papers in order to earn a few more basis points. What is more important to him is the liquidity of the money. Sometimes, he might need to put together a deal that requires cash at only a day or two’s notice. Without cash on hand, the opportunity might be gone.