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The Berkshire weekend: An American tradition

Hari Sreenivasan

Look up 'campy' in the multimedia dictionary of the future, and you may see clips of the Berkshire Hathaway annual company video. It's an introduction to the company's diverse assets, through off-the-wall commercials, parody skits of the holding company's managers, and cameo appearances by celebrities ranging from Tiger Woods, Regis Philbin and Tom Brokaw to multiple performances by Warren Buffett's bridge-playing partner and co-billionaire Bill Gates.

The video is just the warm-up for shareholders and guests packed into the civic auditorium in Omaha, Nebraska. Omaha may not be the financial capital of the universe, but for one weekend a year (April 28-29 in 2001), a disproportionate number of multi-millionaires pile into their private jets (or fractionally-owned jets) and make the pilgrimage here for a rock concert of sorts, billed as the 'Woodstock for capitalists'.

The company business/shareholder meeting actually only lasted seven minutes and 34 seconds this year, though one shareholder noted that there were two minutes of acknowledgements included, keeping the actual meeting around five minutes, a yearly standard.

But it's what happens before and after that value investors flock here for. On stage for six hours (with a one-hour lunch break for burgers, chips, Coke and cookies) after the "meeting" are superstar investors Warren Buffett and Charles Munger, drinking Coke products (of which Berkshire owns 6 per cent), eating Dairy Queen Dilly bars (Berkshire-owned), See's Candy peanut brittle (Berkshire-owned) and occasionally encouraging shareholders to buy expensive jewellery at Borsheim's (Berkshire-owned), in between answering any type of question fielded.

Bring it on - the Q&A

Whether it be the minutiae of the dealings of Berkshire-owned businesses like the projection of Executive Jets margins when it is a mature company, asbestos-related reinsurance policies underwritten by one of Berkshire's many insurance companies, or their viewpoints on economic conditions in particular sectors, Buffett and Munger deliver the gospel the faithful flock to hear.

It is gospel because somehow these men have figured out how to return an average of 23 per cent annually to their shareholders since 1965, a feat unparalleled in modern day investing. If an individual had managed to purchase a single share 36 years ago, he would now be holding on to a compounded return of more than 207,000 per cent. Since the stock has never split, it is currently trading around $68,000 per share.

Though they avoid commenting on individual stocks, Buffett and Munger candidly explain business decisions, and in the process reveal what make them so good at what they do. Part of it lies in their attention to detail and the way they apply it to trends in human behaviour and ultimately in capital allocation.

For example, some shareholders asked about the investments in See's Candy and Coke, and whether Warren was ever worried that the products these companies make would fall out of favour with the general population, and whether the businesses could sustain strong returns. Without any notes at his side, Warren is able to awe the crowd with recitations of facts such as -- the average American eats about 550 lbs of food (dry weight) a year, about a 125 lbs of that are sugars in some sort; on average an American has 64 oz of fluid a day, 30 per cent of which are soft drinks, 43 per cent of those being Coca-Cola products, which means that on an average, every American consumes 8 oz of a Coca-Cola product each day and that one-eighth of all fluids in the US are Coca-Cola products. Based on these numbers, he is long on both companies.

Another element to their success is a sort of yin and yang/micro and macro, between Buffet and Munger. When a 10-year old asked them how they would propose educating children about investing, Warren proceeded to regale a wonderful annual investment competition for high schoolers in Nebraska, while Munger took a macro approach: "You might measure success in just one way, and I want to interject some caution. If all you succeed in doing in life is getting very rich from holding little pieces of paper, it's a failure. There is more to life than wealth creation."

While Buffett is civil, Munger is brash. While Warren gives advice, Charlie offers wisdom. The two exchange barbs at one another all day long, Charlie taking swings at Buffett's horrible golf game, and Warren quipping at his partner's sometime abstract and snide responses to shareholders. This makes for almost a five-hour comedy routine with some investment advice squeezed in. The two men must, between them go through almost a dozen cans of Coca-Cola products (Cherry Coke for Warren and Diet Coke for Charlie), at least a box of peanut brittle and a couple of Dairy Queen treats.

What about tech?

"What the Internet offers is the opportunity to monetise the hopes of others… to take the dreams of millions of people and turn that into cash. There has been very little money created by Internet businesses, it has been a big trap for a lot of people," says Buffett in response to his views of what has been happening with the tech rally and consequent crash.

He clarifies that he isn't necessarily technology-averse, but just consistent with this cautious approach: "We think the Internet is a huge opportunity for certain of our businesses. See's Candy's Internet business is up 40 per cent this year. But I think the idea that you could take any business idea and turn it into wealth on the Internet is just wrong."

How tech fails Berkshire's four filters

They have four fundamental filters for choosing investments and tech fails most of them. First is the business something Warren can understand? The tech boom of the last two years which propelled the Nasdaq to record highs wasn't something Berkshire's $100 billion participated in. "I know who is going to make the money in selling bricks in Texas, and boxed chocolates in California and I know who is going to make money selling blades and razors around the world, I just don't know the answers in technology," Buffett responded when prodded.

If the tech sector had passed the first idea, it definitely fails the second: visibility. "I know a lot of people in that industry (tech) and they think they are going to do okay, but I don't think even they know who the leader is going to be in the next ten years." Their third criterion is whether or not they like and can work with the management team.

Buffett claims that their laissez-faire approach of letting each manager run his own company, even after acquisitions, has been so successful that they have never lost a CEO who left from any Berkshire subsidiary to work elsewhere, an unheard of idea in the tech world where executive churn only becomes more prevalent. Their final filter is the price. Buffett doesn't believe in protracted negotiations, he sets a price and a deadline for the target company to consider, and if it isn't met, he moves on, an idea most tech companies wouldn't be able to comprehend.

The vibe

It's probably the only weekend that the Omaha civic auditorium ATMs run any risk of being withdrawn dry, because most of the 10,000-plus shareholders present probably can withdraw the maximum of $300 from their accounts without batting an eye.

For the most part, they look like the people you see seated in business class as you walk by to your seat in coach. Most are male, in their fifties or older and the longer they have held Berkshire, the more they have to be thankful to Warren and Charlie for. You also realise quickly that Berskhire becomes somewhat of a family heirloom with sons and fathers (and daughters and mothers) coming to see Warren speak, to understand what it is that makes their investment so unique. Warren manages to remember people as they ask questions, and frequently asks which generation they are, because often he has had relationships with a young man's father and possibly grandfather.

It's a chance for some investors to leave their ivory towers on the coasts and reconnect with what is fundamentally American for a few days. They can get $6 tickets to a minor league baseball game on a perfect summer evening and watch Warren throw out the first pitch (which surprisingly managed to get all the way to the plate this year), and eat well-done steaks at medium-rare prices.

Omaha is a place where you can still get a beautiful brick five-bedroom home in a nice neighborhood for under $200,000, while the same price tag in places like San Francisco couldn't find you a condo with parking. It's a place where the pickup trucks actually pick things up, and the SUVs are more utility than sport.

This weekend will not be the same in a few years, when the inevitable happens and Warren and Charlie are gone. They have planned their succession already and are hell-bent on proving their axioms that Berkshire is larger than the two of them. "We've got a lifetime of effort in this. We want to prove that its not based on a couple of guys like us, but we want to make sure it can be institutionalised." After mentioning that the instructions of his succession are sealed in an envelope at headquarters, Buffett added, "When they open that envelope - the first instruction is to take my pulse again."

Hari Sreenivasan is senior correspondent/anchor, CNET.

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