A Pilgrimage To Omaha



By:  Philip Weiss | CFA, CPA – Chief Investment Analyst

Background

Each year on the first weekend in May, value investors flock to Omaha, Nebraska, for Berkshire Hathaway’s (BRK) annual meeting, which has also been referred to as “Woodstock for Capitalists.” This year, I was fortunate enough to be one of the record 38,000 to 40,000 people who made the journey. The crowd was so large that it filled CenturyLink, a 1.1-million square-foot facility that includes an 18,975-seat arena, and a 194,000 square-foot exhibition hall. For the BRK meeting, there are also floor seats. The crowd was so large that some latecomers had to listen from the Hilton Hotel across the street.

For those who are unfamiliar with the term, value investors seek stocks of companies that they believe the market has undervalued or ignored. Such a situation should create an opportunity to buy an investment at a discount.

Although the doors opened at 7:00 a.m., the lines outside CenturyLink started forming during the wee hours of the night. I attended a reception with other like-minded investors the night before and stayed quite late, so I took a shuttle from my hotel that got me to CenturyLink around 6:15 a.m. I found a seat in the second level in the section closest to the stage on one side of the arena. There were four large video screens hanging from the ceiling.

Warren Buffett is BRK’s Chief Executive Officer. He is a legend among value investors—and for good reason. His investment record is unmatched by any other investor in the last 100 years. Buffett invests the cash generated by BRK’s businesses and its float—money generated largely by insurance premiums that does not belong to BRK, but that it temporarily holds. The $20 million float that came with Berkshire’s 1967 purchase of National Indemnity has mushroomed to $77 billion. The company is a long-term shareholder of such iconic companies as American Express and Coca-Cola. Its list of wholly owned subsidiaries includes such well-known businesses as Dairy Queen, Fruit of the Loom, and GEICO. The meeting provides investors with the opportunity to hear Warren Buffett and his right-hand man, Charlie Munger, field attendee questions for about six hours. Munger is BRK’s Vice-Chairman. In this capacity, Buffett describes Munger as “my partner.”

The Event

Although I have personally held BRK shares since September 1998, this was my first time at the company’s annual meeting. What is most special about the BRK weekend is the rare chance it provides to surround oneself with like-minded practitioners and, of course, to learn from the masters. I have read notes taken by those attending the meeting for years, so I had a good idea of what the discussion would be like. What I had never experienced was the nuance, context, and body language of the event. Plus, I really appreciated the repartee between Buffett and Munger. Munger is generally a man of few words, but his comments were always pointed and direct. His dry sense of humor and the interplay between the two often had the audience laughing as well. None of these things can really be replicated electronically. There is nothing like being there.

A BRK movie that can only be seen by those in attendance kicked off the meeting at 8:30 a.m. This year’s version lasted about 45 minutes. It included advertisements for a number of products marketed by BRK affiliates as well as those of some of the businesses of which the company is a shareholder. In addition, it included versions of the classic Sinatra song “My Way” sung by Buffett and Paul Anka (a Canadian singer, songwriter, and actor) and the Village People’s song “YMCA.” The words from both songs were modified so they were about BRK.

The equivalent of a trade show also takes place in CenturyLink’s exhibition hall and helps the company generate tens of millions in revenues. In fact, Nebraska Furniture Mart (NFM) generated roughly $40 million in sales in the week surrounding the event (annual revenues are roughly $450 million). I took a brief trip to NFM. It is the largest store I have ever seen – the Omaha, Nebraska store I visited includes over 420,000 square feet of retail space and is on 77 acres of land.  In addition to furniture, it sells many other items, including electronics, video games, and mobile phones.

Some Q&A Highlights

The Q&A session provides investors with the opportunity to hear Buffett’s and Munger’s perspectives on a number of topics. One of the primary topics this year centered on Coca-Cola’s executive compensation plan. BRK is the company’s largest shareholder. I was among those who were disappointed when Buffett was not vocally opposed to the company’s plan. He chose to abstain rather than vote against it and has come under considerable criticism for this decision.

While I would still have preferred to see BRK vote “no,” I now think the actual vote is less significant than I had presumed originally. Buffett made it quite clear that he believes the executive compensation plan is excessive. Based on his representation that the plan is unlikely to be implemented as quickly as implied by the proxy statement, he seems to have gotten his message across.

An interesting side note to this topic came when Buffett characterized companies and their boards as social organizations. He insinuated that if you go in with guns blazing, you will quickly wear out your welcome and lose effectiveness. These comments provided rare insights into the way boards function. They also raised concerns about the ability to change the way company management teams are compensated. In the current structure, it seems unlikely that board members will vote against executive compensation plans.

Buffet reminded us that you can learn a lot by asking questions, and that you can learn even more by asking the “right” questions. Munger provided an anecdote about NBA Hall-of-Famer Larry Bird, who was able to sign the highest-valued contract in the NBA at the time by asking the right questions.  Bird talked to every agent in the league and asked them, “Other than you, who is the best agent in the NBA?” When they all said the same person, Bird went on to sign with the “second” best agent in the league.

Buffett and Munger also spoke of the “removal of ignorance,” acknowledging that we all, even very famous, successful investors, can continue to learn new lessons on a regular basis. For example, purchasing See’s Candies in 1972 helped Buffett gain an understanding of the power of owning a brand. This lesson later enhanced his appreciation of Coke, which he started purchasing in 1988 at a split-adjusted price of less than $1.70/share, or roughly one-twenty-fifth of the current value. The lesson they learned regarding the power of brand recognition was perhaps more important than the financial rewards it provided. Munger elaborated on how he and Buffett have, over the years, focused on “ignorance removal” at every step and how this has been a source of bountiful returns.

My pilgrimage to Omaha was a great experience. I hope to go again next year.