MEDLEY & COMPANY
An Investment Advisory Firm
June 1999 Investment News
Earlier this month, Tim Medley attended the annual stockholders' meeting of Berkshire Hathaway, the Omaha based holding company managed by Chairman Warren Buffett. This year's event was attended by some 15,000 stockholders who gathered to hear the observations of Buffett and his well-respected vice-chairman, Charlie Munger. The following excerpts were taken from the question and answer portion of the meeting which lasted for just under six hours. (Q represents the question, B is Warren Buffett's answer, and M is Mr. Munger's response.)
Q: Tell us your thoughts about the level of today's markets.
B: We don't think about that. We think about businesses. It is true that currently we have trouble
finding bargains, but that is not a stock market forecast. The money [inside of Berkshire] is piling up;
when we find something, we will pile in.
Q: What will be the effect of the Internet on the retailing industry?
B: It will have an important impact. Any time we are looking to buy a business, we try to think, "how will it look in five or ten years." There have been times when we did not invest because of the Internet. Brand will mean much; [a store like] Tiffany's will have an advantage. I don't see people going to buy jewelry from Brand X over the Internet.
And it affects the real estate of the retailing industry. With the Internet, you can have a store in every town without any rental expense.
Q: In the communications industry there are stocks which hold prospects for substantial revenue growth. Are you considering any of them?
B: Amazing things have already happened in that industry, and an awful lot of money has been made here in Omaha. But, don't always equate prospects for growth in an industry with growth in your net worth. If you had foreseen in 1905 what the automobile and airline industries would do, you might have expected to have gotten rich. As it was, you would have made very little money in the automobile business and none in the airline industry.
Q: The hedge fund, Long Term Capital, almost went under last year, and Berkshire Hathaway was reported to have attempted to purchase the assets of the fund. Your thoughts.
B: [When it was necessary to make a bid on the assets] I was in Yellowstone National Park with Bill Gates, and Charlie was in Alaska. If we had been in New York, I think our bid [$100 billion] might have been accepted.
M: It was interesting how talented the people were and how much trouble they got into. I do not think it is the last convulsion [among hedge funds.]
B: These sixteen people had an average I.Q. higher than any organization you can find. And in effect, on a day in September, they were all broke. When a really bright person goes broke, it's almost always because of leverage.
Q: Any thoughts on Berkshire being included in the Standard & Poors 500 index.
B: We qualify in every way except liquidity [availability of shares for sale]. We are the most significant company not in the index. But 6% to 7% of all equity funds are index funds, and if a market order for 6% of Berkshire occurred, it would not be good.
M: Berkshire will eventually be in the index.
Q: Are you worried about the impact of the strong dollar on the earnings of Coca-Cola?
[Berkshire owns 8% of Coca-Cola]
B: The earnings have been affected by the strength of the dollar particularly against the Japanese yen. But we have no feeling about the dollar. Coke will benefit from the increased prosperity of the world. With Coke, I am concerned about share of market and share of mind. Coke occupies a marvelous share of people's minds. The P/E ratio strikes us as quite full. But it's hard to think of a more solid business.
M: What matters is ten years out. We tune out currency projections and look at the big picture.
"The P/E ratio [of Coke] strikes us as quite full. But it is hard to think of a more solid business."
Warren Buffett
Annual Stockholders Meeting
May 3, 1999
