Berkshire Hathaway 2017 AGM transcript – Part 5

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Berkshire Hathaway’s Annual General Meeting was held on May 6th, with the usual 40,000-odd attendees. It was also webcast on Yahoo Finance, giving us the chance to watch it in full, and live.  There’s always some dorks whining about one or two of their hundred-odd businesses, and the fan-boys asking rubbish about the search for happiness.  The fluff stuff aside, they’re two sharp dudes with clear insights, and answer in old white guy ways, which is sometimes pretty hilarious.

Here’s the final part of the Q&A section.  

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Warren, I was fortunate to ask you a question about legacy and what you wanted to be known for 100 years from now, and I’m kind of curious to hear what Charlie would like to be known for. Warren, I’m 52, so I guess you started doing this when I was born and I’m kind of interested in a memory from your first annual meeting.

My first memory was when Warren got on the subject and they asked him ‘what he wanted said at his funeral?’ He said, “I want them to all be saying that’s the oldest looking corpse I ever saw.”

That maybe the smartest thing I’ve ever said. With me, it’s very simple. I really like teaching, so basically, I’ve been doing it formally and you can say somewhat informally all my life, and I’ve certainly had the greatest teachers you can imagine. If somebody thought that I did a decent job at teaching, I’d feel very good about that.

Everyone has personal dreams at different ages, there will come different dreams. What’s your dream now?

Charlie, I’ll let you take that one. 

My dream, well… Sometimes when I’m especially wishful I think ‘oh, to be 90 again.’ I’ve got some advice for the young. If you’ve got anything you really want to do, don’t wait until you’re 93.

Just do it. That’s the same thing I would tell students. You can’t always find it the first time, but the second time, when you go out in the world look for the job that you would if you didn’t need a job. Don’t postpone that sort of thing. I think somebody like Kierkegaard who said that life must be evaluated backwards but it must be lived forwards. 

You want to sort of, Charlie says all he wants to know is where he’ll die, so he’ll never go there. You do want to do a certain amount of reverse engineering in life. It doesn’t mean you can do everything that way but you may really want to think about what would make you feel good when you get older about your life and you, at least generally, want to keep going in that direction. You need some luck in life and you’ve got to accept some bad things that are going to happen as you go along but life has been awfully good to me and Charlie, so we have no complaints.

Well, you don’t want to be, it’s like the man when they have his funeral and the Minister says, “Now is the time for somebody to say something nice about the deceased?” And nobody came forward. He said, “Surely somebody can say something nice about the deceased.’ And nobody came forward. Finally, one man came up and he said, “Well, his brother was worse”.  

The first question, in your letters to shareholders, you said you believe EBITDAR is not a good parameter to value a business why is that? Can you elaborate on that? 

The second question, you both have very successful and happy lives, from a personal standpoint, do you have regrets in life? If there is one thing you could have done differently in your life, family, personal, or business, what is it? 

I don’t think you should expect us to answer that on personal but in business, I would say I wish I had met Charlie earlier. 

We’ve had a lot of fun ever since I was 29 and he was 35 but it would have been even more fun if we’d started many years earlier. We had a chance to, we worked in the same grocery store but not at the same time. 

In respect to EBITDAR – the depreciation is an expense and it’s the worst kind of expense. We love to talk about float and float is where we get the money first and we have the expense later. Depreciation is where you spend the money first and then record the expense later and its reverse float and it’s not a good thing. 

It’s much better to buy a business that has, everything else being equal, it has no depreciation because it has essentially, no investment and fixed assets and makes X, than it is to buy a company where there’s a lot of depreciation in getting to X. 

Actually, I may write a little bit more on that next year because it’s such a mass delusion and of course, it’s in the interest of Wall Street enormously, to focus on something called EBITDAR because it results in higher borrowing power or higher valuations and all of that sort of thing. It’s become very popular in the last 20-years but it’s a very misleading statistic and can be used in very propitious ways. Charlie, on either one of those subjects?

I think you’ve understated the horrors of the subject and the disgusting nature of the people that brought that term into the evaluation of business. It was just… It would be like a leasing broker of real estate, who had a 1000sqft new suite to be leased and he says it’s got 2000ft in it. That’s not honourable behaviour and that’s the way that term got into common usage. Nobodies right mind would think that depreciation is not an expense.

But it’s very much in the interest of Wall Street.

Yes, that’s why they did it.

Yes.

It made the multiples seem lower.

What’s amazing is the way it’s accepted actually but anyway, it just illustrates how people use language and sell concepts that work to their own use and 2 and 20 has the same sort of thing. The number of people, the amount of money that’s over-performed, after paying 2 and 20, compared to the expenses that have been incurred, I will assure you that it makes for a terrible indictment of that particular arrangement but as long as it can get sold, it will get sold.

Now they even use it in the business schools, and that is horror squared. I mean, it’s bad enough that a bunch of thieves start using a term but when it gets so common that the business schools copy it, that is not a good result.

Perhaps the only thing that makes American workers angrier than layoffs is to shut down an operation entirely and move the jobs overseas. Ask anyone in Ohio and Michigan and they’ll tell you stories about companies that have been operating in those States for decades. Benefitting from the educational system, infrastructure, and so forth. Things that were paid for by local taxpayers but then some high paid consultants came along and showed the company how it could reduce its cost by relocating production to Mexico or China, then ‘poof’ the good US jobs disappeared. My observation is that most investors and those in corporate America today worship at the altar of maximising shareholder value, which is code for doing whatever is necessary to boost the share price as high as possible. But in doing so, companies are taking actions that make millions of workers feel, at best, fearful and left behind and, at worst, deeply harmed by corporate America. It makes so many people so angry that I think it’s testing the post-World War 2 economic order, which is rooted in free trade and even the strength of our democracy. I’d argue that it was decisive in our last election, so my question to you is, do you think that businesses should consider factors outside of pure economics when making these types of decisions? What obligations, if any, do they have to their employees and communities in which they operate, and lastly, if a Berkshire CEO came to you and asked for your approval to close a US operation and relocate it overseas to save money. What questions would you ask beyond the economics of this decision?

Yes, well the truth is that in certain cases production that would otherwise, that had formerly been in the United States, has definitely been supplanted by production that comes from other parts of the world originally. 

I was there when Fruit of the Loom was called Union Underwear and bought by Graham Newman Corp in 1955, I believe, and it was probably all domestic then and the truth is, if it was all domestic now it wouldn’t exist. We had the same thing happen with Dexter Shoe, a wonderful company, with skilled workers and in the end, we sold the shoes at a price that yielded what they cost us. They were not competitive with shoes from around the world. 

Now trade, I would argue both ways, export and import, massive trade should be and is actually, enormously beneficial, both in the United States and in the world. Greater productivity will benefit the world in a general way but to be road kill, to be the textile worker in New Bedford, that was put out of a job eventually, to be the shoe worker at Dexter to have been put out of work, it would be no fun to go through life saying, “I’m doing this for the greater good and so that shoes or underwear were sold for 5% less” or something and the American public will actually, never know. 

So, what you need is two things, in my view. You’ve got an enormously prosperous country, you’ve got almost $60,000 of GDP per capita. It’s unbelievable – six times what it was when I was born, in real terms, so we’ve got the prosperity and that prosperity is enhanced by trade. We were only exporting 5% of our GDP back in 1970, and I think it’s around 12% or something like that now. We are doing what we do best but we need an educator and chief who, and logically the President, and I don’t mean this specific president. I mean any president that’s been around for decades, has to be able to explain to the American public the overall benefits of essentially free trade, and then beyond that we have to have policies that take care of the people that become the road kill in the process because it doesn’t make any difference to me, as far as I’m concerned, if my life is miserable because I’ve been put out of business by something that’s good for 320 some million people in some in accessible way and it’s messed up my life when I’ve tried to live it in a proper way. 

So, we have got the resources to take care of those people. The investors I don’t worry about. I wrote about this a few years ago. The investors can diversify their investments in such a way that overall trade probably benefits them and they don’t get killed by a specific industry condition. But the worker in many cases can’t do that. You’re not going to retrain some 55-year-old worker in New Bedford, who may not even speak English in a textile mill or something. If they get destroyed by something that’s good for society they get destroyed. Unless Government puts in some policies that takes care of people like that and we’ve got a rich society that can do that and we’ve got a society that will benefit by free-trade, and I think we ought to try to hit both objectives of making sure that there is not road kill and that, at the same time again, 320 million people get the benefits of free trade. Charlie?

Well, I won’t quarrel with that. We have unemployment insurance for that exact reason but I’m afraid that a capitalist system is always going to hurt some people, as it modifies and improves. There’s no way to avoid it.

Yes, capitalism is brutal to capital, if you’re in the wrong businesses and, like I say, you can diversify those results. Capitalism is brutal the people that have the bad luck, to be skilled or develop their skills for decades but a very rich society can actually, if it’s beneficial to society overall, it can take care of those people. I mean, the new tax, the Bill that was passed a couple of days ago, reduces my taxes by 17%. It’s not needed by the Government or anything.

I wouldn’t start spending the money.

No, but that was the will. No, I agree, I don’t think…Who knows what happens with the Bill but to have that happen and I think if you pulled a thousand people in Omaha that were walking through a shopping centre as to whether my tax bill, of some very large sum, I don’t think many people would have the faintest idea what happened there, in terms of the coverage of it and all of that that took place. 

We do have probably more like $57 or $58 thousand of GDP per capita. A family of four $230 thousand but nobody should be road-kill in this.

But remember what Bismarck said. There are two things that nobody should have to watch. One was the making of sausage and the other is the making of Legislation.

Well, I would say that somebody ought to watch. Anyway, we’ve hit the magic hour of 15:30. We’ll reconvene at 15:45 to do or have a formal shareholders’ meeting and that may take a while. So, you’re welcome to stay and watch that or you’re welcome to shop and I might even have a small preference to that, but go and do whatever you wish, okay.

 

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