The Ridgewood Group Value Investing Blog

Every May, thousands make a pilgrimage to Omaha, Nebraska in America’s heartland to attend a meeting that is unique in global business. This year, Berkshire Hathaway’s Chairman and CEO Warren E. Buffett (the second richest man in the world) and Vice-Chairman Charles T. Munger (his long-time friend and partner) welcomed 24,000 devotees to the Quest Center in downtown Omaha for an event that has been dubbed a “Woodstock for Capitalists.”    

Attending the Berkshire annual meeting is a transformational event - those who attend receive priceless lessons in business, investing, and life. Long time shareholders have also profited handsomely – a share of Berkshire Hathaway could have been purchased for $70 per share in 1971 and now sells for over $89000 – a compound return of 23.4% per year (Buffett cautions the audience each year that Berkshire’s current size makes it unlikely that future price appreciation will approach the past).

The meeting attracts attendees from all 50 states and around the world. More than 500 attendees this year flew to Omaha from India, Australia, Europe, and other parts of Asia to attend. There were captains of industry, including Bill Gates (who sits on Berkshire Hathaway’s board of directors) and Bob Iger (the CEO of the Walt Disney Company) in attendance. A number of professional investors and investment firms, including The Ridgewood Group, were also represented in the audience. However, the most meaningful participation comes from the tens of thousands of “ordinary” people who come to ask questions and learn from Buffett and Munger’s generous insights and wisdom delivered with their trademark candor and humor.

The Berkshire meeting is both a social and an educational gathering. Most participants arrive prior to the meeting. On Friday, participants get acclimated and/or renew their ties with past attendees and friends. On Saturday morning, the official meeting starts with a humorous movie and this year’s movie did not disappoint. In addition to Buffett and Munger (as well as animated renditions of the duo), the movie included cameo appearances by celebrities and friends like Tiger Woods (the golfer), Bono (the musician and activist), Jimmy Buffett (the singer), Jamie Lee Curtis (the actress), Governor Arnold Schwazenneger, Bill Gates (playing himself), and the cast of the Desperate Housewives (Disney’s hit Sunday night show).

After the lighthearted movie, Buffett and Munger (who sit on a dais at the front of the arena) field questions from the audience for almost five straight hours (with a one hour lunch break). There is no restriction on the subject matter of the questions, so Buffett and Munger’s intellects and humility are on full display as they respond to inquiries in fields as wide ranging as terrorism, social security, the financial performance of Berkshire or one or more of its subsidiaries, and advice for students and aspiring investors. Although Buffett just celebrated his 75 birthday, he appeared to be in great health and displayed tremendous energy and mental acuity as he fielded questions.

The longest comment/question of the day came from an Indian-American physician from Texas who christened Buffett, the “Swamiji of Finance” and praised Buffett for the work he does in teaching and sharing his knowledge and the kindness that he had shown a few years earlier to the questioner’s 6 year old son on one of his rare public visits to christen a new furniture mart in Texas.

Although a more detailed transcript of all the questions and answers would be too long for this article (if interested visit: www.valueinvesting.info for a more detailed transcript of the meeting), some thoughts are included below:

Munger: It is a wise policy to trumpet your failures and to stay quiet about your successes (in response to a question about commodities, Warren admitted that he had made the mistake of buying a large stake in silver too early and then selling it too early – if they still had the stake, they would have made many billions more on the investment)

Buffett: My desk has three boxes (ed. note: metaphorically speaking), IN, OUT, and TOO HARD. We put a lot of stuff in the TOO HARD basket. It is important to know and stick to your circles of competence and pass on things that don’t fit squarely in your areas of expertise (later when a questioner asked about what they thought could be done to improve and fix some of the problems in the $2 trillion health care industry, Munger quipped that that one was definitely in the TOO HARD category).

Buffett: More than half the companies in America have executive compensation schemes that are grossly unfair to the owners – in part because of management overreaching and in part because so many companies now rely on outside “compensation consultants” to set the incentives without proper oversight and accountability by the board of directors. A good compensation scheme should be long-term performance oriented and directly tied to the factors that the managers control (he gave the example that in an oil or energy company, a properly designed compensation system should not pay managers a lot more today because they are earning record profits based on oil prices hitting new highs – a factor that has little to do with management’s actions – but should rather be tied to a long-term metric such as the company’s recent average finding costs of oil – a variable that is likely to more reflective of management’s skill and performance and one that if low will also create significant value to shareholders in the long-term).

Buffett went on to observe that the worst of the seven deadly sins must be ENVY, because it makes the person committing the sin suffer more than anyone else (there was much laughter when he quipped that at least GLUTTONY, which he could fault himself with at times, and possibly LUST had some upsides for the sinner).

In response to a question about commodities and whether it was a good time to invest, Buffett observed that trends in investing and in markets often start out with some fundamental merit such as a legitimate supply and demand imbalance, but that in his experience, there is almost always a point at which speculators take over and begin to dominate the price movements. Speculation usually takes over once the positive price history and upward movement start to become clearer and establish a long enough history which attracts a much wider following. His guess was that certain commodity markets like copper and silver might be in such a speculative phase today. If you play during these times (which most people do), you are playing with fire and risking disaster when the party ends. His general advice was to stay away summarizing his thoughts with the observation that “What the wise man does in the beginning, the fool does in the end.”

At The Ridgewood Group (www.ridgewoodgrp.com), we share many of the philosophies and principles of long-term investing and patience that are shared by Buffett. Indeed, many of the themes we have touched on in previous Biz India articles have been influenced by Buffett and Munger’s ideas. If you are serious about using intelligent investing as a way to secure your financial freedom, it is a great idea to read Buffett’s writings and maybe even attend the annual meeting in person. It is an investment in time that will surely pay many personal, intellectual, and perhaps even monetary dividends in the years to come.
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Kaushal Majmudar is the Chief Investment Officer of The Ridgewood Group (www.ridgewoodgrp.com), a Short Hills, NJ based money management firm focusing on value-oriented investing. Mr. Majmudar, a Harvard graduate and Charted Financial Analyst, is also a noted expert on the investment techniques of great investors like Warren Buffett, the second richest man in the world. You can learn more about Warren Buffett and Berkshire Hathaway, the topic of this article, by visiting www.valueinvesting.info.