When the wise speak, pay attention...

Recently, I came across the following thought provoking comments made during the Berkshire Hathaway AGM where Warren Buffett and Charlie Munger shared their views with an audience of 35,000 shareholders and interested parties:

“If we ran a degree we would just teach students how to value a business and understanding market behaviour. We wouldn’t waste more than 10 minutes on topics like modern portfolio management, etc.”

“Investment is very simple – you’ve got to find a few stocks that you understand and know what they’re worth and stick to them.”

"You got to have inner peace with your decisions once made and then ignore the minute by minute stimuli that come – Emotional stability is vital, more important than a high IQ.”

“Authority does not go with a position – it goes with a person.”

“Of course you’re looking for a business that will do well if it is not managed well – but of course if you have a business like that, you’d prefer it if it is run by people who run it very well.

The $: “The government is doing things (out of current necessity) that will depreciate the purchasing power of the $ - not in the next 12 months, but definitely over the next few years thereafter. The problem is, the market looks ahead and you don’t know when it will start reacting to the expected future inflation. In terms of the relative purchasing power of the $, governments of most developed market countries in the world are following the same policies. So it’s a question of which currency loses most purchasing power over what period of time.”

Regarding complex calculations used to value purchases: “if you need to use a computer or a
calculator to make the calculation, you shouldn’t buy it.” Munger added: “Some of the worst decisions I’ve ever seen are those with future projections and discounts back. It seems like the higher mathematics with more false precision should help you, but it doesn’t. They teach that in business schools because, well, they’ve got to do something…”

“We don’t want contracts – if you make a misjudgement on someone’s passion, no contract is going to save you afterwards. Our model is a seamless way of trust.”

CEO compensation and non-exec directors: “The definition of non-exec directors as being independent is wrong – only if a director is truly independent and does not need the income from his director’s fees is he truly independent. Many directors need the income. More importantly: You want independent directors to think like owners and have business savvy - most independent directors don’t own shares in the company nor do they have any business savvy.” In the end it becomes a club: The CEO nominates the directors and they ensure that he gets good salary increases each year. If they oppose him, it’s unlikely that he’ll nominate them to more boards – which impacts their earnings capacity.

“Charlie always says when we have a difference. I know you’ll figure it out my way ‘cause you’re smart and I’m right.”

When Warren started his partnership in 1956 he promised investors that he would attempt to
beat the Dow by 10% p.a. The current size of Berkshire Hathaway means they can only strive to beat the S&P by a few % points per annum.

Quoted from SIM Global Market Review, May 2009.