The Pilgrimage

The actual day of the Berkshire Shareholder meeting was May 3rd, Sunday. Woke up at 5.30am hoping to get a good seat in the areana. But when i got there at 6.30, there was a crazy queue formed outside quest centre. When we asked the security personnel later, they told us some people started in line overnight!!! Ok. So i'm not the most crazy one.

People filled up Quest centre quickly and 2009 was a record turnout of over 35,000 people despite the swine flu. The event started with the annual video starring different celebrities and of course Warren Buffett and cameo appearance by Charlie Munger.

The Q&A started at 9.30 and lasted all the way till 3.30. The most amazing thing is how much Coke and candy Buffett and Munger eats. Yep, cherry coke and original coke for Buffett and diet coke for Munger. Munger EATS NON STOP. It was really fun to see how laid back and real the two of them are. The quality of the question this year was really great. Half of the questions was asked by 3 jounalist who recieved the emailed questions before the event. Carol Loomis, editor for fortune magazine and long time editor of Buffett's Shareholder Letter, asked some of the toughest question. Of which Buffett simply diverted them to Munger, claiming that its too tough for him.

Opening

The Q&A session started with a screen shot of a bond that Berkshire sold in late 2008. I forgot the exact figures, but it is simply a govt bill that matures in a few months time selling above par. Which means the buyer has bought something that has guaranteed a loss!!! Buffett said that november 2008 was an exceptional time. And it is unlikely that he'll see this in his lifetime again. Negaitve yield!!! Crazy!!! So much for rational, expectations calculating investors. Hahaha.

On Inflation

Buffett said that the greatest financial risk going forward is the risk of high inflation. To protect against inflation, it would be unsound to hold on to debt obligation if the yield does not compensate for the risk taken. Buying companies with 'moat' and pricing power is still the way to go. Return on Capital in real terms may not be high but will be satisfactory. For Berkshire, he will continue to seek out companies earning income outside of United States. But given the large pool of capital he need to deploy and his familiarity with the US market, Berkshire will continue to invest in the US.

When answering question on 'how to best protect ourselves against inflation', both Buffett and Munger suggested that "be the best in the field you are in". E.g best lawyer, plumber, hairstylist...etc. You'll recieve a premium on the available pool of capital (regardless the size) for your skill and knowledge.

On Financial Literacy

Someone asked Buffett how do we promote financial literacy. Buffett said it is a very hard problem to tackle, but he's doing his part by talking to students in hope to rub off some knowledge to them.

Munger gave biting comments on the crazy stuff that is being taught in Business School, namely EMH and the host of advance math used to 'price security'. He said that if at higher level of education people are taught crazy stuff, then its likely that these crazy stuff will be passed down the line. But he suggested that the first thing is to understand that the only way to invest is to first spend less than you earn. The other is to understand the power of compounding and how it works in reverse, e.g. credit card debt costing you 18% p.a. . It is also crucial to understand when is accounting useful and intelligent and when is it not.

Munger and Buffett recommended us to read Jamie Dimon letter to shareholder available here. It is a wonderful read. I shall be re-reading it over the next few days.

On Foreign Exchange Risk

A question was asked by a shareholder from a Euro demoninated country. He asked if he should hedge his exposure to USD/EURO exchange risk. Buffett commented that he is no expert in currency. Munger then said "you've done pretty well in that". Then Buffett off handedly replied "just a few billions...". It was one of the funniest moments in the hall. Everyone was laughing.

But he said that if it is cheap enough to perform a rolling hedge with a widely traded derivative like USD/EURO contract, then you can choose to hedge....not much was said...hahaha.

On Moodys

Loomis asked why Buffett didn't use his stake in Moodys to influence the credit rating agencies. And since he has criticized the way rating agencies work, why did he still hold the shares in Moody's.

His answer here was vague and a little evasive. First he said that the underlying assumption that all the rating agencies made many banks and regulators that was WRONG was that home prices will go up and up and up. If Moody's is the only one that use other assumption, it will have no business to do. (not the best answer in my opinion). Then he said that even in the case of Fannie Mae and Freddie Mac having their own regulator didn't help these two GSE become less foolish.

He also said that Moody's still has a business model that is sustainable, with little need for capital infusion, and has a moat with only 2-4 players in each of the industry they are engaged in. So he would not sell.

Munger and Buffett further added that on their part, they will NEVER rely on any ratings...but exploit them to the extent that if the rating and yield differs greatly with their assessment, there is a profitable opportunity.