Warren Buffett: We Paid Too Much For Kraft | Feb 25, 2019 | Summary and Q&A

Transcript
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Summary
Warren Buffett, Chairman and CEO of Berkshire Hathaway, discusses his annual letter to shareholders and the changes he made this year. He explains why he has shifted his focus from book value to market value as the most relevant metric. Buffett also introduces the concept of "the groves" to group Berkshire Hathaway's assets for easier evaluation. He addresses questions about the performance of Berkshire Hathaway's money managers, the compensation structure of top executives, and the future of Geico under new leadership. Buffett acknowledges the challenges faced by Kraft Heinz and the changing landscape of the packaged goods industry. He emphasizes the importance of interest rates in evaluating the market, discusses Berkshire Hathaway's cash pile, and explains his approach to buying and selling stocks based on changes in the underlying businesses. Buffett also touches on the impact of tariffs on investments and the potential implications of the trade talks with China.
Questions & Answers
Q: What prompted Warren Buffett to start writing his annual letter early this year?
Buffett started writing his annual letter early this year because he had a section in mind that he wanted to include, which he referred to as the "American tailwind." He explains that he wrote it in late summer and then worked on different sections throughout the year. Buffett also notes that he included both book value and market value metrics in this year's letter because he wanted to make the transition clear, and it happened to be a good year for the transition.
Q: Why did Warren Buffett change the most important metric for evaluating Berkshire Hathaway's performance?
Buffett explains that book value is no longer the most relevant figure for evaluating Berkshire Hathaway because the company has become more of an operating company than a company that holds stocks and bonds. He emphasizes that market value is now more relevant over time, although he acknowledges that book value can still be useful as a measure in certain situations. Buffett also mentions that he writes his letter with his sisters in mind, pretending he is reporting to them on their investment, which helps him clarify his message.
Q: How did Warren Buffett come up with the idea of dividing Berkshire Hathaway's assets into "groves"?
Buffett came up with the idea of grouping Berkshire Hathaway's assets into groves to make it easier to evaluate the company. He compares looking at individual assets like looking at trees in a forest, which can be overwhelming and distracting. By grouping assets into logical categories, Buffett believes it provides a clearer picture of the overall valuation of each grove. This approach allows investors to focus on the significant assets rather than getting lost in the details of every business.
Q: Why doesn't Warren Buffett want to name the specific businesses within Berkshire Hathaway that are in decline?
Buffett doesn't want to name the specific businesses in decline to maintain morale within the company. He points out that these companies represent a very small portion of Berkshire Hathaway's earnings, and mentioning them specifically would do more harm than good. Instead, he focuses on the larger, stronger businesses like Berkshire Hathaway Energy and Burlington Northern Santa Fe Railroad, which set records for after-tax earnings last year.
Q: How have Berkshire Hathaway's money managers Ted Weschler and Todd Combs performed since joining the company?
Weschler and Combs initially performed better than the S&P 500 index, but overall, they are slightly behind the index. However, Buffett highlights their contributions beyond just managing investments, such as their involvement in acquisitions and other business ventures. He expresses confidence in their abilities and emphasizes that they have done more work for Berkshire Hathaway beyond managing equities.
Q: How does Berkshire Hathaway structure the compensation for Greg Abel and Ajit Jain, the vice-chairmen responsible for managing various businesses?
The compensation structure for Greg Abel and Ajit Jain is disclosed in the proxy report. They each received $18 million last year, with a high percentage of that being base salary and the remainder as discretionary bonuses determined by Buffett. He explains that their compensation is not tied to the same formula used by most public companies, which allows for tax deductions. Buffett expresses the intention to have them more involved in the annual meeting and welcomes questions directed to them.
Q: Is Berkshire Hathaway planning to make any changes to the structure of the annual meeting to include Greg Abel and Ajit Jain on stage?
Buffett mentions that there may be a rearrangement of the annual meeting format in the future to include Greg Abel and Ajit Jain on stage. However, he also notes that it wouldn't happen every year but when it does, it would involve some changes to accommodate the new format.
Q: How does Warren Buffett evaluate bad news on a holding and determine whether to buy more or sell?
Buffett evaluates bad news on a holding by assessing whether the long-term valuation of the underlying business has changed. He looks for fundamentally good businesses that may be temporarily affected by bad news. If the long-term prospects of the business remain intact and the stock price is discounted, Buffett sees it as an opportunity to buy more. However, he notes that bad news on a fundamentally good business does not automatically make it more attractive. He also emphasizes the importance of considering the long-term valuation and the impact of interest rates on the decision.
Q: What impact have tariffs had on Berkshire Hathaway's companies and investments?
Buffett acknowledges that tariffs have had some impact on Berkshire Hathaway's companies but notes that it only represents a small percentage of their overall business. He acknowledges that tariffs can have an impact on specific businesses and industries, but he does not provide specific details about the extent of the impact.
Q: How has the trade talks with China affected Berkshire Hathaway's investments?
Buffett mentions that some of Berkshire Hathaway's investments have been affected by the trade talks with China but does not provide specific details. He notes that tariffs can impact certain industries and create challenges for businesses, but he does not elaborate on the overall impact on Berkshire Hathaway's investments.
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