2012 Berkshire Hathaway Annual Meeting (Full Version)

Transcript

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Summary

In this video, Warren Buffett and Charlie Munger hold their annual shareholder meeting. They discuss various topics, including the performance and outlook of Berkshire Hathaway, the importance of risk management, the impact of accounting changes on GEICO's earnings, the company's approach to share buybacks, their views on European and American banks, the role of coal and natural gas in the energy industry, GEICO's competitive advantages in pricing, and their thoughts on business school education.

Questions & Answers

Q: Can you explain the role of risk management in Berkshire Hathaway?

Warren Buffett explains that risk management is a crucial responsibility for the CEO of any large financial organization. He believes that risk management should not be delegated and that he, as the CEO of Berkshire Hathaway, is the chief risk officer. The company closely monitors risks like excessive leverage and insurance risk. They also ensure that the leaders of their insurance businesses correctly assess risks.

Q: Can you discuss the impact of accounting changes on GEICO's earnings?

Warren Buffett mentions that an accounting change called deferred policy acquisition cost (DPAC) affected GEICO's earnings negatively by about $250 million in the first quarter. However, this change does not affect the operations or cash of the company. Despite the accounting change, GEICO had a strong first quarter and remains a profitable business with good growth potential.

Q: How does Berkshire Hathaway approach share buybacks?

Warren Buffett explains that Berkshire Hathaway prefers to buy back shares when they are significantly undervalued. The company sets a threshold of 1.1 times book value for buybacks but would consider buying more if the stock is even more undervalued. Buffett emphasizes that the decision to buy back shares is made with the intention of increasing the per-share value for remaining shareholders. Berkshire Hathaway would only buy back shares if they believe it is a good investment for the company.

Q: What are your views on European and American banks?

Warren Buffett states that American banks are in a much better position compared to European banks. American banks have improved their capital positions, strengthened their balance sheets, and have more liquidity. On the other hand, European banks have struggled and needed liquidity support from the European Central Bank. Buffett believes that the difference is due to the structure and regulations of the banking systems in the two regions.

Q: How does Berkshire Hathaway view coal and natural gas as investments?

Warren Buffett points out that MidAmerican, a subsidiary of Berkshire Hathaway, is a regulated public utility that is not significantly impacted by the price of coal. They pass on the costs or benefits of coal prices to their customers. As for natural gas, Buffett believes it is a valuable resource that should be preserved rather than quickly consumed. He expresses concern about using up natural gas at very low prices, as it is a precious resource that should be conserved.

Q: How does GEICO maintain its competitive advantage in pricing?

Warren Buffett says that GEICO continually evaluates various factors related to accident propensity to determine pricing. While they have not implemented technology like telematics for pricing, they are open to adopting such innovations if they provide better predictive value for accident likelihood. GEICO focuses on risk selection, retention, and marketing to maintain its competitive edge.

Q: What changes would you suggest for business school education?

Warren Buffett acknowledges that some business schools have taught students a lot of nonsense about investments. However, he does not believe that business schools are primarily responsible for societal problems. Charlie Munger adds that business school education is improving and believes that the understanding of investing is getting better. Overall, they do not consider business schools to be the cause of major issues in the economy.

Takeaways

In this meeting, Warren Buffett and Charlie Munger discuss various topics related to Berkshire Hathaway and the economy. They emphasize the importance of risk management, the performance of their investments, and the specific challenges in the banking and energy sectors. They also comment on GEICO's competitive advantages and share their thoughts on business school education.