1998 Berkshire Hathaway Annual Meeting (Full Version)

TL;DR

Successful investing does not require solving the hardest problems. Buffett and Munger favor understandable opportunities that can be cleared like one-foot bars, while valuation multiples reflect expectations about business prospects, future returns on equity, and interest rates. Their discipline centers on making fewer predictions, avoiding unnecessary difficulty, and recognizing that enthusiasm can raise a company’s valuation without guaranteeing that the optimism will prove justified.

Transcript

[Applause] morning [Applause] good morning i'm warren buffett chairman of berkshire and this is my partner this hyperactivity fellow over here is charlie munger and we'll do this as we've done in the past following the saddam hussein the school of management we're going to go through the business meeting in a in a hurry and then we're going to do q... Read More

Key Insights

• Relative price-to-earnings ratios rise when investors become more optimistic about a company or industry compared with the rest of the securities universe. Buffett cautions that this revised assessment of relative prospects may eventually prove justified or unjustified.
• Absolute price-to-earnings ratios reflect the investing public’s view of prospective earning power and future returns on equity. They also respond to changes in interest rates, so valuation levels cannot be understood solely by examining a company’s current reported earnings.
• Decreasing interest rates had pushed stock prices upward in aggregate from 1982 through the period discussed at the meeting. Buffett also attributes higher absolute valuation multiples to dramatically improved returns on equity among American businesses and growing investor belief in that improvement.
• The key to Berkshire’s forecasting approach is making fewer predictions rather than attempting to forecast every possible development. Munger suggests that any advantage Buffett and he possess comes partly from restricting their judgments to situations where they can reach more dependable conclusions.
• Investment returns do not include a degree-of-difficulty bonus. Buffett compares investing with Olympic diving, explaining that a difficult decision earns no greater payoff than a simple one when both are executed successfully, so unnecessary analytical complexity offers no inherent reward.
• Berkshire’s preferred opportunities resemble one-foot bars that can be stepped over rather than seven-foot or eight-foot bars requiring exceptional leaps. This metaphor captures Buffett and Munger’s preference for understandable situations where successful execution does not depend on solving unusually difficult problems.
• The shareholder meeting separates required corporate governance from the broader discussion of Berkshire’s businesses. After rapidly approving the minutes, confirming a quorum, electing directors, and formally adjourning, Buffett and Munger move to questions organized across designated audience zones.
• The question session permits discussion of subjects on shareholders’ minds but excludes details about securities Berkshire is buying, selling, or considering. Buffett also asks participants to limit themselves to one question, helping the meeting cover more topics during the scheduled sessions.

Questions & Answers

Q: What makes a company’s price-to-earnings ratio rise?

A company’s relative price-to-earnings ratio rises when investors expect its prospects to improve compared with those of other securities. Greater enthusiasm for a particular business or industry can therefore lift its valuation relative to the wider market. Buffett emphasizes that such optimism is an expectation, not proof, because the revised assessment may ultimately be justified or may turn out to be wrong.

Q: What determines absolute price-to-earnings ratios?

Absolute price-to-earnings ratios respond to how investors assess a business’s prospective earning power and future returns on equity. Interest rates also affect these ratios. Buffett says decreasing interest rates pushed stocks upward in aggregate, while improved corporate returns on equity and growing investor confidence in those improvements also helped raise absolute valuation levels.

Q: How do interest rates affect stock valuations?

Decreasing interest rates can push stock prices and absolute price-to-earnings ratios higher across the market. Buffett identifies falling rates as one force that had supported stocks in aggregate from 1982 through the period discussed. He treats interest rates as a central valuation input alongside expectations about future earning power and returns on equity.

Q: Why can an industry’s relative valuation increase?

An industry’s relative valuation can increase when investors become more enthusiastic about its prospects than they are about other available securities. That enthusiasm leads buyers to accept higher price-to-earnings ratios for businesses in the favored industry. Buffett cautions that the expectations behind the increase can later be validated, but they can also prove mistaken.

Q: How do Buffett and Munger approach investment predictions?

Buffett and Munger try to make fewer predictions instead of forecasting a large number of difficult outcomes. Munger says that if their predictions have been somewhat better than those of others, this restraint is part of the reason. Their approach concentrates attention on situations they can understand and avoids decisions that require reliably resolving unusually difficult questions.

Q: Why does Buffett compare investing with Olympic diving?

Buffett uses Olympic diving to show that investing does not reward difficulty for its own sake. Divers receive a degree-of-difficulty adjustment for successfully performing complicated dives, but investors do not. A simple investment decision can pay just as well as a complex one when executed correctly, so attempting the hardest analytical challenge provides no automatic financial advantage.

Q: What does Buffett mean by looking for one-foot bars?

One-foot bars represent investment opportunities that are relatively simple to understand and execute successfully. Buffett contrasts them with seven-foot or eight-foot bars that would require exceptional effort or forecasting ability. Because investors receive no extra reward for overcoming unnecessary difficulty, Berkshire prefers manageable situations where sound judgment can produce an adequate result without an extraordinary leap.

Q: What topics would Buffett not discuss at the meeting?

Buffett says he and Munger will discuss almost anything shareholders have on their minds, with one clear exception. They will not disclose what Berkshire is buying, selling, or potentially considering buying or selling. This limitation keeps current or contemplated securities transactions outside the public question session while leaving Berkshire’s businesses and investment principles open for discussion.

Summary

In this video, Warren Buffett and Charlie Munger hold the annual meeting for Berkshire Hathaway shareholders. They discuss various topics including the election of directors, the criteria for buying and selling stocks, the importance of the insurance business, and the impact of technology on businesses. They also touch on the issue of campaign spending and their thoughts on it. The video ends with a Q&A session where they answer questions from the audience.

Questions & Answers

Q: How do relative and absolute price-earnings ratios move?

Relative price-earnings ratios move up when there is an expectation of better prospects for a specific industry or company compared to others. Absolute price-earnings ratios move up in response to changes in interest rates and based on the perceived future earning power of a business. The recent increase in corporate profits and improved return on equity has also contributed to the rise in absolute price-earnings ratios.

Q: How do you forecast improvements in price-earnings ratios?

Our predictions are often better because we make fewer of them. We prefer to focus on simple and understandable investments rather than complex ones. We believe that one can be successful by focusing on businesses with good prospects and better returns on equity. We look for businesses that will be better in the future and buy them at a reasonable price.

Q: How can individuals find a mentor in value investing like Warren Buffett found in Ben Graham?

There are a few educational institutions that offer courses on value investing, such as the University of Florida and Columbia. They bring in practitioners and experts in the field to teach students. It is also helpful to read books and publications on value investing and attend conferences or seminars where industry experts share their knowledge and insights.

Q: Are there good investment opportunities in Japanese companies trading below net working capital value?

While there have been reports of value investing in Japanese companies, Warren Buffett and Charlie Munger are less enthusiastic about those stocks. Japanese businesses generally have low returns on equity, which makes it difficult to generate good returns as an investor in the long run.

Q: What are the criteria for deciding when to sell stock?

The best scenario is to buy stocks that you don't ever want to sell. The focus should be on buying good businesses at reasonable prices and holding onto them for a long time. Selling may be necessary if the investor needs money for other investment opportunities or if the valuation between different stocks or sectors appears out of balance. However, the preference is always to hold on to great businesses for as long as possible.

Q: What is the most important business in Berkshire Hathaway's portfolio, and what are the second and third most important businesses?

The insurance business is considered the most important business in Berkshire Hathaway's portfolio. Flight safety is the second largest source of earnings. However, Warren Buffett and Charlie Munger emphasize that they enjoy and find value in all of their businesses. The ranking of importance may change based on the opportunities and profitability of each business.

Q: Will the high returns on equity in the banking sector be sustainable in the long term?

Warren Buffett and Charlie Munger do not believe that the high returns on equity in the banking sector will be sustainable in the long term. These returns may be a result of a unique set of circumstances and may not be replicable in the future. They caution against assuming that such high returns are normal or can be sustained indefinitely.

Q: What are your thoughts on campaign spending and its impact on the stock market and global economy?

Warren Buffett personally believes that the escalation of campaign spending by businesses can have a significant impact on political influence and regulations. He has joined efforts to restrict soft money and promote fast disclosure campaign finance reform. He predicts that campaign spending by businesses will continue to increase, creating an arms race for political influence. Legislation may be necessary to address the issue and prevent undue influence on government decisions.

Q: What are your thoughts on the year 2000 compliant issue and its impact on the stock market and global economy?

Warren Buffett and Charlie Munger believe that the year 2000 compliant issue will not have a significant impact on Berkshire Hathaway. They have taken measures to ensure compliance within their company. However, they acknowledge that some areas in national, state, and local governments, as well as foreign governments, may be behind in their preparations. This could lead to challenges and additional expenses for those entities, but they do not foresee a major impact on the stock market or global economy.

Q: Can you share your thoughts on controlling campaign spending?

Warren Buffett has joined efforts to control campaign spending, particularly by businesses. He believes that the increasing influence of money on politics is a cause for concern. The cost of political influence has been an underpriced product in the past, but as the price rises, it may create an imbalance in the political system. He believes legislation and reform are necessary to address this issue and prevent an escalation of spending in political campaigns.

Q: Are the high returns on equity in the banking sector sustainable?

Warren Buffett and Charlie Munger do not believe that the high returns on equity in the banking sector can be sustained indefinitely. It goes against classic economic theory to believe that such returns can be consistently achieved. The sustainability of these returns depends on factors such as the overall growth of the economy, interest rate changes, and the ability of businesses to manage their capital efficiently.

Summary & Key Takeaways

• Warren Buffett opens Berkshire Hathaway’s May 4, 1998 shareholder meeting, introduces Charlie Munger and the company’s directors, and quickly completes the formal proceedings. Shareholders elect the nominated directors after the inspector reports that proxy votes already exceed the required majority, allowing the meeting to proceed to an extended question-and-answer session.

• Buffett explains that relative price-to-earnings ratios rise when investors expect a company or industry to perform better compared with other securities. Absolute ratios respond to perceived future earning power, expected returns on equity, and interest rates. Lower interest rates and stronger corporate returns on equity had contributed to higher stock valuations.

• Munger says Berkshire’s forecasting advantage, if it exists, comes from making fewer predictions. Buffett adds that investors receive no extra reward merely for attempting difficult analysis. Berkshire therefore seeks simple, understandable opportunities, described as one-foot bars to step over, instead of pursuing complicated challenges resembling high-difficulty Olympic dives.