Monday, May 5, 2008

Berkshire Meeting Recap - Things You Didn't Read in the Mainstream Media

Here are some good quotes from the Berkshire meeting in Omaha that took place last weekend. Most of these were not reported in the mainstream media as they seemed to focus on his "think small" comment regarding returns. I did not attend the meeting, but culled these quotes from the notes taken by Shai Dardashti, and posted on Seeking Alpha. They are not exact quotes since no recording equipment is allowed during the question and answer period.

1) Question - How to pick great managers?

I can’t be of help if you are looking at group of MBAs. They know at this point in life how to fool you, what answers to give you.

My Commentary - Damn right, when I was in grad school, we spent a lot of time learning how to lie during interviews.

2) Question - A University of Chicago Graduate student asked me once, what are we being taught that is wrong?

In business school the amount of time spent teaching option pricing is total nonsense. You only need 2 courses, how to value a business and how to think about stock market fluctuations.

My Commentary - One could make the same claim about the CFA program as well.

3) Question - Big positions. How do you get confident enough?

Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the exact rule is the opposite. The ‘know-nothing’ investor should practice diversification. Diversify– but it is crazy if you are an expert. If you only put 20% in the opportunity of a lifetime – you are a not being rational. Very seldom do we get to buy as much of any good idea as we would like to.

4) Question - Are investment banks too complicated? Risks unknown?

I think Fed did right thing with Bear. They would have failed on Sunday night, and walked to a bankruptcy judge. They had 14.5tril of derivative contracts – not as bad as it sounds, but the parties that had those contracts would have been required to undo the contracts to establish the liability from the estate.

My Commentary - Surprising answer given his reputation for being unforgiving to people who take too much risk.

5) Question - Do you believe in Jesus Christ?

Buffett - I am an agnostic.
Munger - I don’t want to talk about my relationships.
Buffett - Being an agnostic I don’t have to have an opinion.

My Commentary - Certainly the most surprising question of the day.

6) Question - How do we better measure leverage and accounting of assets, integrity?

Munger - A lot goes on in bowels of American industry which is not pretty. A lot of people got overdosed on Ayn Rand. They would hold that even if an axe murderer in a free market is a wise development. I think Alan Greenspan did a good job on average, but he overdosed on Ayn Rand that whatever happens in free market is going to be alright. We should prohibit some things. If we had banned the phrase, “this is a financial innovation which will diversify risk”, we would have been far better off.

Buffett - When you get into CDO squared, the documentation is enormous. If you read a standard residential security – it consists of thousands of mortgages, then different tranches. Then take CDO and take junior tranches on a whole bunch of juniors – put them together and diversified in theory – a big error to start with. That was nuttiness squared. You had to read 15,000 pages to get a CDO, then 750k pages to evaluate one security in a CDO squared. To let people use 100cents they paid vs. the 10cents it trades at in market is an abomination.

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