Friday, 2nd May 2014
Anyone who has attended the Berkshire Hathaway annual meeting has his or her own favourite story to tell. Lyle McIntosh has many, but there is one he loves to repeat at the annual get-together of the Yellow BRK’ers, a community of Berkshire shareholders, at Omaha. McIntosh, an Iowa-based corn and soya bean farmer who first bought into Berkshire in 1985, has been attending the annual meeting since 1988 and is one of the original members of the Yellow BRK’ers, whose earlier gatherings were attended by Warren and his daughter Susie.
This is how McIntosh’s tale goes: Renting out pinball machines to barbershops was Warren’s first real business. To celebrate Warren’s 70th birthday in 2000, McIntosh and his fellow Yellow BRK’ers decided to take a trip down memory lane and bought a pinball machine as a gift.
The machine had a few kinks and McIntosh and Warren’s pinball business buddy Don Danley were fixing it in the store room of Berkshire’s office building. They had a know-it-all from Las Vegas for company, who squirted the machine with excessive contact cleaner and the machine suddenly exploded in flames. In the headquarters of one of the biggest insurance companies in the world, they couldn’t locate a fire extinguisher. Warren’s assistant, Debbie Bosanek, eventually contained the flames with a pitcher of water. McIntosh and Danley managed to clean up the machine and got it working partially before finally gifting it to Warren.
“That day, Warren took us out to Gorat’s Steak House and I asked Debbie if we had burned his office down, would he have still taken us out for lunch? She just laughed,” concludes McIntosh with a grin.
These days the Yellow BRK’ers’ gathering, which takes place a day before the big event, is a meeting ground for new and old attendees alike and this year, too, saw shareholders from Canada to Vietnam in attendance. The group’s mascot, a big yellow hat, was popularised by the late John Gartmann, who seemed to attract a crowd wherever he went with the hat on.
Working behind the scenes to keep the Yellow BRK’ers going are Alex Bossert and Shai Dardashti. Bossert is an upcoming analyst whom we had met during our first visit to Omaha last year and Dardashti runs his own fund management company in New York. The latter is a rare breed considering that he visits Omaha during the weekend but does not attend the annual meeting as it is held on Saturday, the Jewish day of the Sabbath. Though a regular attendee during his college days, Dardashti stopped attending about four years ago and now relies on friends for notes on what transpired during the annual meeting. He feels that there is so much nuance in Buffett’s wisdom that reading a transcript is sometimes better than hearing him live: you pick up what’s between the lines or what he is not saying.
About the meetings he attended earlier, he says, “The best analogy I like to give is that you are hearing Albert Einstein talk about physics in a way that everyone comes away understanding what physics actually is. Even if there is no new insight or discovery, it is still worth hearing Einstein discuss physics.”
McIntosh expects tomorrow’s Q&A session to be peppered by questions on Coke, succession and dividends. The latter two have popped up in some form or the other in earlier meetings, but the Coke options query was a potential hot potato as Warren had abstained from voting and David Winters of Wintergreen Advisors had turned up the media glare on the issue.
McIntosh considers himself blessed that unlike others who fly in from all over the world, he can just jump off his tractor in Iowa and land straight in Omaha. One such attendee, who flies in regularly from India, is Raamdeo Agrawal, co-founder of Motilal Oswal Securities. Agrawal first attended the annual meeting in 1996 and has since visited a dozen times. “I had read all his letters and accepted him as a teacher as they gave me an investing framework. When I first attended, hardly two or three thousand people were present but the consistency experienced was striking.”
Of the many meetings that he has attended so far, the one in 1999 stands out for Agrawal. He recollects that there was almost a sense of hostility among shareholders as Warren had stayed away from technology shares. “One shareholder said, ‘You know Bill Gates so well and with your intellect, it is very difficult to believe that you don’t understand technology. Hence, you must apologise to your shareholders for not buying tech stocks’. Buffett replied, ‘I don’t know what is going to happen to tech companies over the next 10-15 years and there are people who can manage tech better than me’. This response was met by booing from some quarters. The next year, the moment the meeting started, there was a five minute standing ovation for Buffett for not having lost money in tech stocks. The insight from the 1999 meeting allowed me to perfectly time my exit from the tech sector. I sold almost at the top,” adds Agrawal.
Saturday, 3rd May 2014
The guys in charge of the sound equipment at the Berkshire meeting sure have a wicked sense of humour. Their opening number as the admission gates open: Money by Pink Floyd. From the press box, it seems as if the shareholders — in their rush to grab a prized seat — are rushing right towards the gigantic speakers blaring out the 1973 hit. This sense of humour flows right from the top.
Alex Rozek is a Boston-based private investor and the grandson of Doris Buffett, Warren’s elder sister. Having had the privilege of being family, Rozek testifies what has been repeatedly told to us and what we experienced firsthand when we met him earlier in the week — Warren’s incredible sense of humour; just being around him is funny. The experience is so incredible that McIntosh says Warren could have his very own late night show. That sense of humour is soon on display during the annual meeting, as he ribbed partner Charlie Munger or himself whenever the opportunity presented itself. He pulled his first punches during his early morning round in the exhibition hall, when he came across a Heinz truck selling a bottle of Warren Ketchup at $2 and a bottle of Charlie Ketchup at $1.50, after a second markdown from $1.75. Given his popularity, Warren quipped, “Charlie should be selling at $1”.
The Berkshire movie (earlier about 15 to 20 minutes long, now close to an hour in length) which plays before the Q&A is a big draw and this year’s highlight was Warren crooning a customised version of My Way with Paul Anka (who, after having listened to Comme d’habitude by Claude François, bought the rights and tailored it for Frank Sinatra). The song, immortalised by Ol’ Blue Eyes, has since been covered by many and Warren, too, identifies closely with its gumption. Warren (and Charlie) has a deeply competitive streak and that continues to thrive within him even today. So, while his ‘Crazy Warren’ sales clerk act at Borsheims, a jewellery store owned by Berkshire in Omaha, may seem like playing to the gallery, deep within, he wants to outdo himself every year. That’s why My Way resonates with him even more. Small wonder, then, that it was an appropriate song for him to have fun and pay tribute at the same time to Charlie and Debbie.
As the Q&A session begins, McIntosh is right on the money. The question about why Warren decided to abstain from voting against the Coke management’s compensation plan gets posed first. (Backdrop: The management at Coke intends to remunerate itself by issuing shares subject to defined targets being achieved. The compensation plan was deemed excessive by many investors, prominent among them David Winters of Wintergreen Advisors. Warren abstained from voting but the proposal was eventually approved. Warren had traditionally opposed issuance of excessive stock options, which is why shareholders were perplexed by his behavior.) The Coke issue was diffused somewhat going into the annual meeting as there was talk of the Coke management planning to reconsider the tenure of the options. But shareholders still needed to know the reason behind this unBuffett-like behavior.
Warren has seen this movie before. There was a din over his PetroChina investment as also the fallout of David Sokol’s alleged insider trading in Lubrizol. The Sokol episode might have been more painful for Warren, given that Sokol was being talked about as one of the prime contenders to succeed Warren as chief executive of Berkshire. Regarding PetroChina, Buffett said that if he sold his PetroChina shares, there were others who would buy it and selling in itself would not address any underlying issues.
Clarifying his decision to abstain on the Coke management’s remuneration issue, Warren said, “We made a clear statement about the excess, and we did not go to war with Coca-Cola, and we did not endorse some inaccurate calculations. I don’t think going to war is a very good idea and if you ally with someone, you have to be very sure of who you go with. I received some letters on it, after they had been released to press. I think it is best to be careful of alliances with someone you don’t know.”
Historically, Warren has been averse to confrontation of any kind and has erred more on the side of trust and praise. In fact, during the meeting, Charlie said Berkshire’s weakness was that they over-trusted their managers, but the results are better off because of it.
The mention of over-trust by Munger took one back to the Sokol episode. Warren operates with the explicit assumption that all Berkshire managers are acting as fiduciaries. That is why, despite Sokol claiming to have told Warren about holding Lubrizol stock, Warren clarified during the 2011 meeting, “I obviously made a big mistake by not saying, ‘Well, when did you buy it?’” Warren’s over-trusting nature is also reflected in the absence of micro-management. Though Berkshire-controlled companies have over 300,000 employees, the corporate headquarters has just 25.
Soon after his stance on Coke was made clear came up another question: how could Howard (Buffett’s eldest son) be an effective protector of Berkshire culture, given that he was a director on the board of Coke and had voted for the Coke pay plan? Warren replied, “People need to pick their spots or they will not only be ignored, but not heard on other issues. My son Howard’s job (at Berkshire) is not to select the CEO or set compensation. Howard is there to facilitate a change if the board of directors decides it is needed. Munger agreed, “I think the general idea that people should shout down everything they disapprove of isn’t right. If we all did that, we wouldn’t be able to hear each other.” After that, the rest of the Q&A was a breeze, with most questions focused on the prospects of the various Berkshire companies.
Almost everyone who attends the annual meeting is hooked and leaves with a promise to revisit. Agrawal keeps going back as the Q&A acts as a refresher from someone whom he considers very inspirational. “I grow in my own way and investing anyway is about evolving every day. It is not for everybody, it is only for fanatics.”
Sunil Mahtani, founder of Connecticut-based Kingfisher Investors, and Erwin Hosono are among the fanatics. Mahtani’s initiation to Berkshire happened through John Train’s 1987 book, The Midas Touch. His curiosity piqued, he first attended the annual meeting in 1994 and again in 1999 and has been visiting every year since. He has also brought his daughter along a couple of times and says it is hard for him to think of another role model than Warren. “If you ask me which company’s annual meeting I would rather attend than Berkshire’s, I would draw a blank.” As we speak, his eyes dart towards the few remaining welcome posters for the just-concluded annual meeting. Given that the annual meeting has run its course, the posters are being peeled off and discarded by the housekeeping staff at the CenturyLink Convention Centre. Mahtani peels one off for himself as memorabilia and promises to frame it for posterity once he gets back home to Westport.
As for Hosono, a Palo Alto-based private investor; his first visit was in 2000 and he brought along his wife and eldest son during the later visits. He sounds excited about the fact that his eldest son will finish high school this year and wants to attend the annual meeting next year. “If you get this kind of exposure early, it can really shape your personality,” he says.
Some might bring along family but a few attend the meeting to meet family. Rozek’s earliest memory of attending the annual meeting is carrying around his Star Wars figurines as a kid and enjoying the fun barbeques at the Nebraska Furniture Mart. Having attended the event more than a dozen times, the annual meeting is a really special time, as this is when he gets to see family. “We live all over the place, all the way down to California, Albuquerque, the Midwest and New England. It is a bit of a family reunion every year,” he says.
Sunday, 4th May 2014
Warren’s handpicked investment managers Ted Weschler and Todd Combs have kept a low profile so far, but made an exception by running this year’s Brook’s race. And, surprise, the race was flagged off by Warren’s executive assistant Tracy Cool. Cut to Borsheims, where Ariel Hsing’s table tennis skills and Patrick Wolff’s chess smarts were on display. Adding to the buzz was Norman Beck with his magic.
For every Berkshire weekend, the sales team at Borsheims works something up to excite shareholders. This time around, in the run-up to the meeting, about 51 diamonds with Warren’s signature engraved on them were up for sale. The first lot sold like hot cakes and the remainder was lapped up on Sunday. ‘Savvy Warren’ would be a more appropriate moniker than ‘Crazy Warren’ for this Sunday, as he is anything but crazy despite the discounts offered. Not only were Warren’s sales skills on display, there was also ample public display of affection. With Warren playing counter salesman, Eric Lefante proposed to his girlfriend Carrie Fischer, who gleefully accepted. Always a gracious closer, Warren pushed in a free round of champagne to celebrate the occasion. Incidentally, there is a precedent to this and Warren had a role in facilitating both. Only, in the first instance, the crowd was much larger and there was more at stake.
In early 2009, Rozek thought up the rather bright idea of proposing to his girlfriend, Mimi, during the Berkshire Hathaway annual shareholders’ meeting. He bounced this off Warren and Doris and they decided to play along. For Rozek, though, the job was far from done. Not only did he have to ensure that Mimi was in attendance that day, he also had to make sure that she stayed right through the five hours that the Q&A usually lasts. To hold her interest, Rozek told her that there would be a surprise in the last 30 minutes. At 3 pm, they moved from the general seating to the private enclosure, where the board of directors and family members were seated. This change of seats, closer to the directors, was the ‘surprise’, he told Mimi. He recalls, “I was nervously checking my watch as I knew what would happen at 3.30 pm and Mimi was chomping on the peanut brittle that she had bought on the exhibition floor.”
As the hour neared, a nervous Rozek downed a dozen Diet Cokes and kept feeling his pocket to check if the box containing the ring given to him by his grandmother was indeed there. What added to his anxiety was the rather high attendance on that day. Usually, the crowd starts to thin a little as the meeting moves on. But 2009 was the first year that Warren brought in three journalists to ask questions and it resulted in a sticky audience. At 3.30 pm, on cue, Rozek was allowed to ask the last question of the day. He got up and said, ‘I am Alex, from Boston’ and Warren played along, saying ‘who, from where’? Given that it was 2009, he asked Warren about ways to get the US economy back on track. Warren launched into a discussion on household formations and luxury purchases and asked if it gave Rozek any ideas. At this point, Rozek’s family members were looking at him, smiling, as they knew what was coming next.
As he turned to Mimi, she had a horrified look on her face as she thought Rozek would prod her to ask a question. So her eyes were saying, ‘Don’t hand that microphone to me’ and Rozek just said, ‘Mimi, you are my best friend, would you be my wife? She just stared and didn’t say anything. “I remember standing there, looking at the doorway. If this went horribly wrong, I had identified two different exits from where I would just dead sprint out of the arena and never come back to Omaha again,” he guffaws. Thankfully, Mimi said ‘yes’ and that exit plan did not come into play.
Of the earlier meetings that he attended, Dardashti still retains a few key takeaways. He recalls Warren being prescient in 2006 about content being superior to the routes through which it was delivered. Warren had said, “At one time, [the major television networks] had a licence from the government and were the only three highways to the eyeballs of millions for advertisers to choose from. But now, there are many highways. It’s hard to imagine these businesses getting better in aggregate over time.” Dardashti thinks Warren’s discussion on ‘pipes’ as compared with ‘content’ remains relevant with the advent of Twitter, Facebook, and other 21st century forms of mass broadcasting.
The other guide map that Dardashti continues to use, more so in the current times, is the distinction between ‘turnarounds’ and ‘polishing’ mentioned in Buffett’s partnership letters. In 1979, Buffett wrote, “Both our operating and investment experience cause us to conclude that ‘turnarounds’ seldom turn” and, a year later, clarified, “The GEICO and American Express situations, extraordinary business franchises with a localised excisable cancer (needing, to be sure, a skilled surgeon), should be distinguished from the true ‘turnaround’ situation, in which the managers expect — and need — to pull off a corporate Pygmalion”. “This nuanced understanding of ‘turnarounds’ (structural issues that might not turn) compared with ‘polishings’ (raw jewel with a layer of dust) is at the core of how I approach investing in 2014,” says Dardashti.
The Yellow BRK’ers gathering this time had a lot of first-time attendees. For the group, the biggest challenge is to preserve the culture. (Berkshire Hathaway will also face this issue over time and that is why elder son Howard Graham Buffett has been marked by Warren Buffett as a future custodian. See interview ). That means first-timers have the same values as those who have been coming for 30 years. But is that, indeed, happening as the 60- and 70-year-olds stay away and the 20- and 30-year-olds show up? McIntosh, who has been making the pilgrimage for 25 years, says it was a special feeling when about 500 people attended the meeting. Now he jokes with his friends who bought ‘B’ shares later that they ruined the culture, because “we used to dress in a suit and tie for every meeting and when the ‘B’ shareholders came in, the dress code went straight down”. But on a less sartorial note, can one say that a new lot is not turning up at Omaha just because it is a sexy thing to do so?
David Kessler, a research analyst at Robotti & Company on his first visit to Omaha, says, “I have been in value investing only since 2006 but even in that short a time, it seems to have become much in vogue to declare oneself a value investor. If you Google ‘value investing’, the first thing that is going to come up is Warren Buffett, that attracts a lot more people as well. That said, the amount of people you hear that wrote letters to Buffett and actually got letters back is enormous compared to any other public figure. Of course, it is much harder now.”
Dardashti is a little more circumspect. “There is a joke in the Monty Python skit: ‘Repeat after me, ‘we are all individuals’. When the whole crowd is saying that, you are obviously a part of the crowd.” The market’s run up from the depths of the financial crisis has made Dardashti wary. “My opinion is we are in the late stages of a bull market. The level of self-confidence is higher than that back in 2010. No one is having any self-doubt about their skills and people start rattling ideas one after the other. When everyone has an idea at the tip of their tongue, it is 2006 and not 2009.”
Kessler says it is amazing how much people remember the past four or five years. There is a recency bias and people are quick to forget. “When I graduated from Columbia Business School in 2008, I and many of my classmates were keen to work for free to get into the industry. That is not happening right now.”
Shareholders, however, are a happy lot and are far from tight-fisted when it comes to spending some of the monies that Warren has made them. With the Berkshire Hathaway stock price at an all-time high, attendance certainly seemed more than the year before. In the exhibition booths, everything from boxer shorts to See’s Candies sold like hot cakes and equally high buying enthusiasm was evident on Sunday at Borsheims.