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More Buffett Munger 08 shareholder Q&A

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I quoted some questions which are relevant for little guys (like me). The full transcript can be located at gurufocus. WB: Warren Buffett, CM: Charlie Munger, MX: yours truely.

BTW, I bought one more BRK.B yesterday, at $4130, not the lowest price of the day but about 5% off the price I bought for my first share. A few things happened since April 3 the day I bought it: the CEO of General Re resigned because of AIG scandal; Mars Wrigley deal; annual shareholder meeting (BRK.A and BRK.B both ran before the meeting); the Q1 earning result was not good because of paper loss of stock index derivatives. But I don’t think those things worsened the value of BRK in anyway.

Q9: Melbourne Auz. Berkshire has bought a lot of shares in last twelve months in listed companies. Do you expect return to be between 7-10% pa over many years? Well below achievements in past.

WB: Yes. We would be very happy if we could buy pretax returns of 10%, dividends included. We would probably settle for a little less than that. Berkshire returns will be less, no question, in future than in past. We operate now in universe of marketable stocks with caps of 10bil, but really 50bil and up in order to have an impact. This universe is not as profitable. If we find 10bil, a 5% position is 500mil. If it doubles, we make 325m, this is less than 2/10ths of 1%. We have found things to do time to time to make money. They are nice, but don’t move needle much at Berkshire. Anyone who expects us to replicate past should sell their stock. We’ll get decent returns, but not indecent returns.

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Bet against Buffett?

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It seems there is lots of confusion about Berkshire (NYSE:BRK.A, BRK.B) options (paper) loss in its Q1 earning report, especially among individual investors. First, let me quote Buffett’s take on those options in his recent annual shareholder letter (link to letters):

“The second category of contracts involves various put options we have sold on four stock indices (the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of $4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between 2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate, will be profitable and that we will, in addition, receive substantial income from our investment of the premiums we hold during the 15- or 20-year period.

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Weekend thoughts w/e 050308

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Here is a link to Q&A transcript of Berkshire Hathaway 08 shareholders meeting. I believe this is more comprehensive than CNBC’s live blog I posted earlier.

Berkshire first quarter earning
It went down more than 60% over same period a year ago (PDF). But the number does lie sometime, because this is mostly from paper loss of very long term derivative. One may wonder how come Buffett got into this derivative thing? Isn’t that risky?

Well, in a way we are all invovled in this derivative world. Think auto insurance. When we pay premium for car insurance, it’s like buying a put for our cars and the insurance company is selling the put. If the underlying (car) got demaged, we will be paid by the insurance company for the loss. But most of times our cars are fine, and the insurance companies make money. We all know insurance is Berkshire’s main business and Buffett’s expertise area. My point is Buffett is not new to derivative. He is the financial guru of our time. While his main expertise is buying common stocks and business (in which he emphasize the moat, the durable competitive edge), he also has good understanding and made money on bonds, commodity and foreign currency etc. One interesting example I read from his latest annual letter is he bought Amazon Euro (junk) bond after dot com bubble: he got upsides both from the apperication of Euro and Amazon itself a few years later.

Chinese speaking representative in BoA
We went to the local BoA branch, and to our surprise, one of the financial representative speaks Chinese (Mandarin). He said he had worked in Beijing. One thing I heard is foreigners in Beijing tends to learn Chinese, while those in Shanghai don’t. On a related matter, it appears the interest of learning Chinese is rising among foreigners.

Food stocks

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Early days of Berkshire shareholder meeting

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(Update) Meet the Buffetts (NBR Susie Gharib interview with 3 Buffett children, Howard, Susie, and Peter).

Working with Buffett (NBR Susie Charib interview 3 CEOs working for Berkshire subsidiaries).

Berkshire shareholder meeting at its early days
Quote from CNBC:

Buffett: It’s a gathering of partners. And, you know, we have a lot of partners, but I like the fact they feel part of the act. And to see it’s a real company, real products, real people. And, I get to see real stockholders, so it’s, it’s, it’s a gathering.

Becky: It started out as a very small event. When was the first, when was the first one?

Buffett: Well, if you go way back we used to hold ’em in New Bedford, Mass., where Berkshire Hathaway started. So I would go back there. And, and it was me and somebody taking the minutes… And we would have about anywhere between 8 and 12 people, for the next 10 or so years until about 1981. And my aunt Katie would come and my Uncle Fred. I always packed the audience with people that would be sure to nominate me.

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Why not Berkshire for stock investments

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I know no broker offer this as an option in IRA. But how about buying Berkshire (BRK.A, BRK.B) over mutual funds in a taxable brokerage account? Not only does Berkshire has a track record which beats almost all mutual fund (21.4% annual compound return in last 42 years) and the 10.4% annual return of S&P 500. See this Buffett’s 2006 letter for details. But also an investor get the service of the best investor with virtually no fees: Buffett is paid a salary of 100,000. So why don’t we all give the money to Buffett, rather than mess up with our own investments, which in most cases can not beat Buffett’s performance in long term.

I can think of the following reasons:

1) We think it’s harder and harder for Buffett to repeat the performance he had in last 42 years. It’s practical because as much as Buffett is getting better (he is a life long learner), his portfolio is growing so big that expecting an annual return of 20% is impossible.

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Another Milestone for GOOG

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Today marks another milestone for the search giant Google, its market capital (outstanding shares times the stock price) exceeded Warren Buffett’s good old Berkshire Hathaway’s market cap $165.71 B at one point (when Google stock hit today’s high at $534.99), GOOG closed at $527.42 (with a market cap of $164.32 B).

BRK.A is a holding companies of some well known companies, such as Geico and Diary Queen. Just think Wall Street values Google as valuable as all these (50?) very well managed traditional companies putting together, are we seeing another bubble here?