Berkshire Meeting Notes Part V
The beauty of railroads is that we have the economics behind them and the economics almost always win out. Politics aside, there’s no compelling enough argument against them. There are regulations to deal with, but the economics play a tremendous role in sorting them out. Railroads are the best way to move lots of heavy stuff a long way. Gotta love the simple take there and it’s so true.
Question from an individual in the forest industry. Is there any interest? Can move it, have companies that will use it and can insure the stuff. Any thoughts? They have not found any that met their tests for returns. They don’t look at it from the perspective of how it may or may not trickle down through the other parts of Berkshire’s business. It wouldn’t be a level playing field for Berkshire in regard to many conversions to REIT structures. Berkshire can’t really compete with that.
Statistical Probabilities and $20 Billion
Why $20 billion? No magic number at all, it all boils down to making sure that the company is protected. They won’t risk what they have for what they don’t need. September 11, September 2008, incidents that you simply cannot predict. Buffett and Munger talk this stuff all the time, calibrating the various exposure Berkshire has and maintain what they need to be able to sleep at night.
On Todd and Ted
How do you ensure they don’t chase short-term gains for the sake of long-term performance? Pay them each a salary of $1 million plus 10% of the amount by which their portfolios beat the S&P500 on a three year rolling basis. Each one is paid 80% on their own interest and 20% on the other’s. Great incentive for them to work together and focus on the long-term success of the company. They do their own thing, Buffett doesn’t micromanage, wants to let them produce. Very encouraged by their performance thus far.
What will it take to get America growing again? Is 4% possible? Well, the population grows at about 1% per year and average GDP growth of 2.5% per year so 4% is quite high, 1.5% real growth at 1.5% would be outstanding. We really are a phenomenally wealthy country, but as we get bigger it gets more difficult. Expectations are way too high, 4% is unrealistic. We should be hoping for something like real growth of 1% which would be sensational. I love the dose of reality these guys provide.
Dividend and Buybacks
Why no dividend? If the stock is too expensive to buy back, why not pay a dividend? Buffett can still create more value by every dollar retained. So far it has worked out well, but you never know, it gets tougher as time goes on. Bottom line is that at present, management is very confident in their ability (and the math that backs it up) that retention of those dollars creates more value for shareholders than paying them out.
How do you minimize other than learnings from your own? Try to avoid the mistakes that will take you out of the game completely. When you have a natural instinct to do things on a big scale, this becomes a bit tougher. Buffett doesn’t think a lot about it (his mistakes) other than he knows he’ll make them. Focus on what he’s learned about people over the years which helps him become better, but it doesn’t necessarily play out directly on eliminating mistakes. Munger is a big fan of learning from other people’s mistakes. Munger has found over a long life that one competitor is usually enough to ruin a business.