Closed Berkshire’s 2015 jamboree

Berkshire Hathaway shareholders came out in record numbers to mark the golden anniversary of Warren Buffett’s control of the company but the celebratory atmosphere did not stop some tough questions being put. Mr Buffett was prompted to full-throated defence of partner 3G’s management practices. in a reminder that, for his folksy charm and liberal values, Mr Buffett remains a capitalist through and through.

Warren Buffett flung open the doors of the Berkshire Hathaway meeting a day early this year – giving shareholders more time to shop. Golden anniversary souvenirs include a glossy history book and everything from ketchup to running shoes to boxer shorts emblazoned with Mr Buffett’s likeness.

The company is expecting a crowd of 40,000 to have gathered by the time formal proceedings get under way on Saturday at 8.30am.

Shareholders are likely to want reassurance from Mr Buffett that Berkshire’s railway subsidiary BNSF is getting its operational issues under control, after a year of delays, disruption and disappointed customers.

There is at least a partial answer in Berkshire’s quarterly results, which came out a short while ago. BNSF’s improved profits were a highlight, and the company said its customer service was on the mend:

We attribute operational improvements in 2015 to capacity added in 2014 through capital investments for line expansion, system improvement projects, additional equipment, new employee hires and other operational initiatives.

The FT’s story on the results is here.

The doors are open, the CenturyLink Center arena is filling up, and Mr Buffett is in the building, touring the exhibition hall where Berkshire subsidiaries and investee companies are displaying their wares.

No Kraft cheese on sale here yet. Its acquisition by Heinz hasn’t closed, so shareholders will have to make do with commemorative packs of Heinz ketchup and mustard for another year.

Stopping at the Heinz stall, Mr Buffett lauded the partnership with 3G Capital, the Brazilian private equity group with which Berkshire bought Heinz in 2013 – and he hinted that their acquisition spree is far from over.

“I like big deals,” he said, “but they really like big deals.”

This golden anniversary year of Warren Buffett’s association with Berkshire has been an occasion for reflection, so the FT asked business and investment luminaries to talk about the lessons and the legacy of Mr Buffett. We will be posting a few of their thoughts here throughout the day.

Lights down, video starting, and we’re off…

Belly laughs and a party atmosphere as Berkshire opens the meeting with its traditional video, which features a John Landis-directed skit of Warren Buffett taking on Floyd Mayweather in a parody of tonight’s showdown in Las Vegas.

Buffett takes to the ring under the moniker “the Berkshire Bomber”, and where Mayweather puts in a gum shield, Buffett stuffs his mouth full of See’s Candies. We are told Buffett’s fight strategy is “he wouldn’t hit a guy with glasses, would he?”

With a confetti cannon, and to the strains of With A Little Help From My Friends, Warren Buffett and Charlie Munger take the stage…

Tough first question from a shareholder called Frank Gifford (via journalist Carol Loomis) who says his Berkshire investment has started giving him ethical “heartburn”.

Mr Gifford said he “cannot make the moral case” for the business practices at Berkshire subsidiary Clayton Homes or by Berkshire’s private equity partner 3G Capital.

Clayton has attracted scrutiny for its high-priced loans; 3G has laid off thousands of people at Heinz, Tim Hortons and other portfolio companies. Mr Buffett mounted a full-throated defence of both.

Clayton is the largest manufactured housing business in the US and as well as making these low-cost homes, it also provides mortgage financing to customers. In fact, the lending aspect of the business is why Clayton is part of the “finance and financial products” division at Berkshire.

A recent Seattle Times article set out a litany of customer complaints alleging unsuitable loans and other predatory business practices.

You can read the article here

Clayton’s response here

“I make no apologies whatsoever about Clayton’s lending terms,” Mr Buffett said. “I’m proud of Clayton’s management.”

The company is going to sell homes to around 30,000 people this year, he said, “at very low costs, a very good home, and a very high percentage of those people will have loans paid off in 20 years and have a home that is a bargain.”
On 3G, neither I nor Charlie Munger have ever said there should be more people than are needed in a company, Mr Buffett said.

I tip my hat to what the 3G people have done… I hope our Berkshire companies are not being run with more people than they need, either.

In defence of sugar.

Berkshire has been “long sugar consumption” for 50 years, thanks to investments in Coke and See’s Candies, a shareholder asks. “Have we reached an inflection point in human behaviour regarding how we view sugar consumption?”

Mr Buffett says people have been writing off Coca-Cola since a Fortune magazine article in the 1920s.

I think you will see all beverage companies adjust to the expressed preferences of their consumers. No company ever does well ignoring its consumers. But I will predict 20 years from now there will be more Coca-Cola cases consumed than there are now by some margin.

Mr Buffett also jokes about his legendary sugar consumption, and his Cherry Coke-for-breakfast habit. “I’m one quarter Coca-Cola. I’m not sure which quarter.”

As we move on to another question, both he and Charlie reach for a See’s Candies chocolate from the box in front of them…

Outside the love bubble inside the arena here…

Warren Buffett reveals that it was Greg Abel, chief executive of Berkshire Hathaway Energy, who suggested rebranding the company’s chain of real estate brokers under the Berkshire name.

Mr Buffett conceded it was something of an experiment, however, and said he did not expect to turn Berkshire into a household name consumer brand.

“I told him if I started hearing any abuses or anything, then we would yank it,” Mr Buffett said he told Mr Abel.

By making the estate agents, and soon the newly-acquired auto dealers, trade under the Berkshire name, it ought to make staff think twice about unethical behaviour, Mr Buffett said.

And if there are abuses, he added, “if I hear about them because the name is Berkshire, maybe I will get on top of them sooner than I would otherwise.”

Is Berkshire Hathaway a systemically important financial institution, or Sifi? No, no, not by miles, says Mr Buffett.

The issue of whether Berkshire’s reinsurance business is important enough to warrant extra regulatory oversight by the Financial Stability Board in Basel has become a bone of contention between the Bank of England and the US Treasury (story here).

Mr Buffett did not engage in that dispute, when the question came up this morning. More important than the Basel process, he said, is the process run by the US Financial Stability Oversight Committee, which is examining which non-bank companies should be designated as Sifis. The FSOC could demand such companies hold extra capital, something that crimps profits.

Berkshire doesn’t come close to having 85 per cent of its revenues from financial services, Mr Buffett said, and by the way it was a supplier of capital to troubled institutions during the financial crisis of 2008.

It’s a moot question. The law exists, we haven’t been approached about it… There is no reason in logic or in terms of what we have heard, to think that Berkshire would be designated as a Sifi… We always conduct ourselves in way that the problems of others can’t hurt us in a significant way.

Berkshire’s next chief executive will be someone with experience operating a big business, not an investor, Mr Buffett said at the meeting this morning, when analyst Jonathan Brandt probed for more clues on the company’s succession plans.

“I’ve learned a lot through operations that I wouldn’t have learned if I stayed in investments all my life,” Mr Buffett said.

Mr Buffett’s role will be split apart after he leaves, under current plans agreed by the Berkshire board, with a non-executive chairman, a chief executive, and one or more chief investment officers taking his place.

While the favoured CEO candidate has been identified by the board, it is not a name Mr Buffett will reveal. The betting is that Greg Abel, chief executive of Berkshire Hathaway Energy, the utilities division, is the frontrunner, with reinsurance boss Ajit Jain and Matt Rose, chairman of the BNSF railroad also sometimes mentioned.

Mr Brandt’s question was aimed at teasing out whether a wider pool of candidates might be in the mix, perhaps including Mr Buffett’s investment deputies Todd Combs and Ted Weschler.

An investor-CEO was “not inconceivable but unlikely”, Mr Buffett said.
None the less, he did heap praise on the duo of ex hedge fund managers Berkshire hired earlier this decade and which shareholders uniformly refer to as “Todd and Ted”.

They have gradually assumed a larger role at Berkshire, with Mr Combs helping to negotiate the takeover of Duracell and Mr Weschler overseeing Berkshire’s first acquisition in Germany, Mr Buffett said.

They are smart about business and know the right touch to apply in terms of how much to get involved. They identify with Berkshire and not with themselves.

The FT has profiles of the potential successors to Mr Buffett’s combined roles, as well as the other leading players at Berkshire Hathaway, in an interactive graphic here.

Lunch break. Off to sample the merchandise at the exhibition hall. Back soon.

Some insurers, including Travelers, have listed climate change as a risk factor in their annual report to regulators, known as the 10-K, but it is something that mystifies Warren Buffett.

Here’s how he tackled the issue, as the afternoon Q&A session got underway:

We set up one year at a time, and I see nothing that tells me that on a yearly basis global warming is something that should cause me to change my prices a lot or even a small amount.

That doesn’t mean it isn’t a threat to humanity or terribly important. If I was writing a 50 year wind storm policy in Florida I would think very hard about what global warming might do in that case to the incidence and potential intensity of hurricanes. But it is not something I would put in the 10-K as a threat.

Warren Buffett’s swipe at Whole Foods provokes a Twitter response…

Warren Buffett is sounding more optimistic about bagging overseas acquisitions than he has done for some time, and one reason is a financial adviser called Zypora Kupferberg.

Ms Kupferberg was instrumental in Berkshire’s breakthrough deal to buy Louis, a German retailer of biker gear, earlier this year.

Now she is getting other calls from other business owners wanting to sell, and Mr Buffett predicted at least one more deal in Germany in the next five years.

We’re eager, we have got the money, and we do fit the family situation occasionally -and prices may be a little more attractive there than in the US.

The FT’s story on the Louis deal, and the chain of connections that made it happen, is here.

Warren Buffett is asked whether, after he is gone and his estate disposes of its stake, Berkshire will become vulnerable to activist hedge fund managers urging the company to break itself up.

His response?

By the time that gets to be a reality I think the market value of Berkshire will be so great, even if the activists gather together, they won’t be able to do much about it. Berkshire is likely to be a very, very large organisation.

He also warned that any supposed break-up premium an activist might claim would be illusory.

I think it’s unlikely that on any long term, or intermediate term, basis that the value of the parts will be greater than the value of the whole.

Warren Buffett may be a liberal hero for supporting higher taxes on the rich, but he will have disappointed some of those fans just now by coming out against a big hike in the minimum wage.

Asked his views of income inequality in the US, Mr Buffett revealed he will shortly be publishing an article arguing instead for expanding tax credits for working families.

“I don’t have anything against raising the minimum wage,” he said, but it would come at a cost in terms of available jobs.

There are such things as supply and demand, and if you were to move it up dramatically it’s a form of price fixing. It would change the opportunities available very dramatically. I am much more a believer in reforming and enlarging the earned income tax credit.

Mr Buffett is a supporter of Hillary Clinton’s bid for the White House. His intervention in one of the hottest political questions of the moment raises an intriguing question: does his policy prescription reflect the thinking of the Clinton campaign?

And that’s your lot, at least for the Q&A part of the meeting. We still have the formal business of the meeting, to elect directors and so forth, but after six hours, the indefatigable Buffett and Munger have finished adding to the canon of quotable investment and life advice.

A good moment, then, to test your Buffett knowledge in this golden anniversary year. The Oracle of Omaha has kept a remarkably consistent investment philosophy over 50 years. Can you match our Buffett quotes to the correct year, 2015 or 1965?

Start the quiz here.

The 18,000-seat arena at the CenturyLink Center in downtown Omaha was full, the overflow rooms elsewhere at the centre overflowed, and even special screening rooms set up at the Hilton hotel across the road were standing room only. Berkshire Hathaway shareholders came out in record numbers to mark the golden anniversary of Warren Buffett’s control of the company, but the celebratory atmosphere did not stop some hard questions getting asked.

There were fewer existential questions this year on the future of the company after Mr Buffett. Instead, the focus was on present controversies, from accusations of predatory lending at Berkshire’s Clayton Homes subsidiary, to whether Berkshire is so big it could bring down the financial system.

But perhaps the strongest theme of the day was income inequality and labour policy, with Mr Buffett forced to defend the big layoffs at companies run by his private equity partners 3G Capital, and himself weighing in against a big hike in the minimum wage in the US.

Most memorable moment of the day? Mr Buffett’s full-throated defence of 3G’s management practices. “I hope our Berkshire companies are not being run with more people than they need, either,” he said.

The exchange, and several others today, was a reminder that, for his folksy charm and liberal values, Mr Buffett remains a capitalist through and through.
This has been, after all, the Woodstock of Capitalism.