The Warren & Charlie Show

Its the annual meeting for Berkshire Hathaway shareholders and board memebrs, and Warren and Charlie stayed 6.5 hours in the presentation followed by a lengthy Q&A. This is a 100% cut & paste job with zero input from me, but what these old geezers said are worth pondering. Here's some of what they said:

WB sounded a bearish note about the current environment of cash-flush private-equity funds, high corporate profits and bond prices that don’t adequately reflect financial risk.
... said he expected an external event would eventually upset the credit markets. Such an event — which he said could be as significant for credit markets as the Long-Term Capital Management meltdown in 1998 — would present opportunities for Berkshire, however, because the company could profit on mispriced securities. There was a “seize-up of the credit markets” during the LTCM episode, and “people will see that sort of thing again.” Quoting Mark Twain, he added, “History doesn’t repeat itself, but it rhymes. We will have something that rhymes with 1998.”

WB doesn’t expect a contraction of credit orchestrated by the government — through a sharp hike in interest rates, for example — but says one could be triggered by unexpected forces. In the past, he has mentioned the increased use of derivatives in the financial markets as an area of such possible dislocation. “Most authorities are reluctant to step on the brakes,” he said in answer to a question about global liquidity. “But you could very well see some exogenous event that feeds on itself in the markets.”

WB was also bearish on the sustainability of high corporate profits in the U.S. For one thing, if they were to continue at their recent rate of growth, he said, it wouldn’t be long until political forces would start agitating for higher taxes. “Corporate America is living in the best of all worlds, but… I would not expect corporate profits to continue to be 8.5% of GDP” far into the future."

CM said that consumer spending, financed through credit, is poised to wilt and potentially contribute to a slowdown in corporate-earnings growth. He cited the example of South Korea, where the economy and corporate profits suffered several yeas ago after banks extended too much credit to consumers through credit cards and consumer loans. “I don’t think this is the time to swing for the fences,” said CM.

Warren Buffett and Charlie Munger said company directors should more actively scrutinize big acquisitions, particuarly if they’re all-stock deals. WB said chief executives with “big egos” become easily enamored with big acquisitions, goaded on by investment banks who stand to benefit from big banking fees. Directors should engage chief executives and “get a real balanced discussion about the economics of what you’re doing,” adding that “it’s been pretty bad in the past few years” in terms of boards approving deals promoted by charismatic CEOs.

CM added “The self-serving delusional nature of even some very good minds in terms of IQ points is amazing.” Big deals, in general, “are contrary to shareholders’ interests,” WB said deals that use shares as currency deserve particular scrutiny. He cited the example of Berkshire’s own acquisition years ago Dexter Shoes, which involved some 2% of Berkshire stock. “When I gave away 2% of Berkshire Hathaway to acquire Dexter Shoe, it was dumb. You’d all be 2% richer if I hadn’t done that.”

About half a dozen Berkshire Hathaway shareholders, including the daughter of Holocaust survivors, appealed to Warren Buffett during the annual shareholder meeting to divest Berkshire’s holding in PetroChina Co. Ltd. The shareholders said the divestment would send a message to the Chinese government, which they said supports the Sudanese government and the genocide in Darfur. WB said shareholders were mistaken in thinking PetroChina has any impact on the Chinese government, or that a divestment of the Chinese oil company would influence Beijing. The Chinese government owns 100% of China National Petroleum Corp., which owns about 88% of PetroChina. A shareholder resolution to divest PetroChina sponsored by shareholder Judith Porter, a retired professor, was defeated by a margin of more than 98%. “PetroChina in no way tells the Chinese government what to do,” said WB. “We have no disagreement with what PetroChina is doing.” He added that he sees “no effect whatsoever in Berkshire Hathaway trying to tell the Chinese government how to conduct their business,” although he added that he is in full agreement over the significance of the problems in Darfur.

CM, Berkshire Hathaway’s 83-year-old vice chairman, isn’t a fan of ethanol despite growing up in the cornhusker state. “I think running automobiles on corn is one of the dumbest ideas,” in response to a question from a shareholder about the costs and benefits of ethanol. He said it doesn’t make sense to drive up the price of food to grow corn for ethanol use. “I love Nebraska to my core, but it’s not my home state’s finest moment.”