1986 Annual Meeting1986 年度股东大会

Piecing Together Berkshire Hathaway's 1986 Annual Meeting

CNBC’s invaluable archive of Berkshire Hathaway annual meeting videos and transcripts only dates back to 1994. Meaning that decades’ worth of Q&A sessions with Warren Buffett and Charlie Munger remain shrouded in the mists of time.

You will occasionally stumble upon a fragmentary account about one of the early Berkshire meetings, whether it’s in the pages of the _Omaha World-Herald_, _Outstanding Investor Digest_, or _University of Berkshire Hathaway_ (by Daniel Pecaut and Corey Wrenn). These typically include a few partial quotes and other highlights from Buffett’s remarks — but nothing like the comprehensive records of the post-1993 meetings.

So, today, I’ll do my best to piece together various accounts — from the three aforementioned sources — about Berkshire’s annual meeting in 1986. I’ve compared several different reports from the meeting and organized the commentary by topic.

This cannot claim to be the definitive study of Berkshire’s 1986 meeting — there are, no doubt, holes big enough to drive a truck through — but it’s my best effort to compile all of the available information about the wit and wisdom on display that day.

On May 20, 1986, approximately 500 shareholders filed into the Witherspoon Concert Hall at Omaha’s Joslyn Art Museum for the Berkshire Hathaway annual meeting.

That Tuesday morning, Warren Buffett and Charlie Munger sped through the formal proceedings in a matter of minutes — before opening the floor to questions from shareholders for the next two-and-a-half hours.

Below is everything that I could find from this (very) early episode of the Warren & Charlie Show…

On inflation

1.“\[Inflation\] is a political phenomenon, not an economic one. If you print lots of tickets, ticket prices decline. If you print lots of dollars, the value of each dollar goes down. Eventually, that has to happen. I see no evidence of any great self-restraint that will change our propensity to print money.”

2.“I expect a lot of inflation in the long run. Unfortunately, I can’t define ‘a lot’ and I can’t define ‘the long run’. But I expect worse inflation than we have ever seen before. Fortunately, I’ve been wrong \[about inflation\] quite often.”

- Buffett added ominously, “Most people in this room will see inflation that they have never seen before.” Happily, that did not turn out to be the case.

On Berkshire’s acquisition strategy

3.“You can have a wonderful business without it being a wonderful stock. But it’s quite another story to have a wonderful stock without having a wonderful business.”

4.“We have no equations. Ben Graham used to say that it’s a lot like selecting a wife. You can thoughtfully establish certain qualities you’d like her to have — and then, all of a sudden, you meet someone and you do it.”

- If Berkshire found a company that it wished to “marry” — at a fair valuation — Buffett assured shareholders that he would not be put off by a high price tag. “Don’t hold back on showing us a \[potential\] deal because we don’t have the money. We have yet to not do a deal because of not having enough money.”

On investing in Capital Cities/ABC

5.“Capital Cities is not a stock holding, but a 10-20 year relationship.”

- In 1985, Berkshire helped finance the media company’s merger with ABC by purchasing 3 million shares of Cap Cities at $172.50 a piece. This $517 million investment made Berkshire the largest shareholder of Cap Cities/ABC.

6.“They have strong management at Cap Cities — the best management of any public company in the country. I have enormous confidence in Cap Cities.”

- This was no idle flattery. Buffett had complete faith in the management duo of Tom Murphy and Dan Burke — even agreeing to sales restrictions on Berkshire’s stake and to vote his shares in accordance with Murphy and Burke.

7.“The near-term outlook \[for Cap Cities/ABC\] is not good. The value of ABC’s franchise has deteriorated in the last 6-12 months. However, the networks did $6.5 billion of business last year. It will be there — like radio. Despite inroads from television, \[radio\] is still quite profitable. ABC will be around forever.”

- “If people ever take up reading,” Buffett joked, “that will cut into \[our\] business.”

8.“I have repressed the memory of the sale of Capital Cities \[a few years earlier\].”

- Berkshire had previously owned shares of Cap Cities, but sold out of this position in 1978-1980 at just $43 per share. And while Buffett claimed to have repressed any memory of this blunder, Munger was quick to point out: “I kept my personal holdings \[in Cap Cities\].”

- Interestingly enough, OIDreported that Berkshire’s equity portfolio (which, presumably, the Cap Cities proceeds were reinvested into) actually outperformed the Cap Cities stock price between 1980 and 1985. So, ultimately, Buffett out-compounded his own mistake.

On speculative excess in media stocks

9.“The underlying business has deteriorated substantially from competition, cable, the VCR, etc. — all adding up to more consumer alternatives. At the same time, media prices have skyrocketed. Prices don’t make sense to me.”

10.“You don’t care what channel the football game comes in on. You don’t have loyalty to any \[one\] channel.”

11.“I try not to get caught up in the current mania, but it’s hard to avoid.”

12.“During tulip mania, single tulip bulbs were exchanged for houses and businesses. If you could buy a company that owned twelve tulip bulbs for a 20% discount to the value of those tulip bulbs, would that be a bargain?”

- Buffett’s point is that a 20% discount from an irrationally high price does not necessarily equal good value.

- The _Omaha World-Herald_ gives a slightly different version of this quote (or maybe it’s a subsequent remark that’s just very similar to this one). Like I said, piecing this all together is a bit of a guessing game. The _OWH_ quote is below as #14.

13.“\[Tulip mania\] was mass delusion. People traded homes for a single tulip bulb. If you owned twelve tulips, is that \[the same thing as\] a sound company?”

14.“Buyers are most silly when they’re most happy.”

15.“We’re not interested in the hula hoop.”

- The hula hoop catches a stray here as a fad that Berkshire would try to avoid. In 1958, an estimated 80-100 million hula hoops were sold — but then quickly went out of fashion. “It was born in January and dead as a doornail by October,” said Rich Knerr of WHAM-O. By 1985, sales had stabilized in the 1-2 million range.

- Buffett added that the inventors of Trivial Pursuit had recently sold their company, but should have done so sooner before the game’s popularity “hit the skids”. He apparently had the toy/game industry on his mind that day.

On shorting stocks

16.“The mathematics \[of shorting\] are very unattractive. You can go broke very quickly. If you had shorted tulip bulbs long after the prices had become silly, the prices would have kept going up for a long time. It’s a tough way to make a living. I’ve tried it.”

17.“\[It’s\] quite a contrast to buying bargain stocks. So long as you buy without debt, you can keep buying by the bushel basket as prices decline.”

On macroeconomic forecasting

18.“Economic forecasts have a small role in any decisions we make. We pay no attention to what anyone thinks the Gross National Product or interest rates will do.”

19.“\[It\] plays a very small role in our securities and business acquisitions. We haven’t found any reliably consistent forecasters anywhere. We don’t subscribe to any economic forecasting letters.”

20.“If there were one future variable that I wish I had the answer to, it would be future interest rates.”

On refusing to sell a subsidiary — even a mediocre one

21.“You may quit having children if you keep having clunkers, but you don’t just cast them out.”

- Munger jumped in to add that whatever this policy lacks in terms of bottom-line sense, it’s more than made up for by burnishing Berkshire’s reputation among sellers. “It allows \[us\] to see businesses for sale that \[we\] might not otherwise see.”

On the lack of international investments

22.“We don’t understand overseas businesses.”

23.“If you can’t make money in a $2 trillion pool \[in the United States\], you’re not likely to make it elsewhere. Anyway, we only understand maybe 10-15% of U.S. companies. There are many complexities of investing overseas.”

On Berkshire’s stock price

24.“The current market price \[around $2,690 per share\] is near the high end of intrinsic value — give or take 15%. But it’s not a crazy price, by any means.

- Munger was also asked about Wesco Financial’s future performance. “\[We\] still haven’t come up with an acceptable strategy that we’re satisfied with. I don’t think it’s a good bet that Wesco will outgrow Berkshire Hathaway.”

On insurance

25.“Currently, it’s an outstanding market for insurance companies to write new business. I wouldn’t want to bet on \[what it will be like in\] 1988.”

26.“When insurance companies get money in their pockets, there’s a great eagerness to write business. The easy business will disappear very fast.”

27.“We sell insurance. We don’t buy it.”

- In response to a question about “key man” insurance on Buffett and Munger.

On Berkshire’s investment philosophy

28.“Value investing and growth investing are one and the same. Growth is a part of value. \[They are both\] part of the same equation. Returns on incremental capital are the key. Despite that, I still can’t find any bargains in today’s market. We don’t currently own any equities to speak of.”

- When Buffett says that Berkshire doesn’t “own any equities to speak of”, he wasn’t talking about his core holdings of Cap Cities/ABC, Washington Post, and GEICO. He reiterated that those would continue to “be held indefinitely”.

29.“Our core holdings don’t keep us busy. However, they give us something to do and keep us out of bars.”

30.“We’re going to be there every day. We’ll run on a fast or sloppy track.”

31.“We see nothing in marketable securities that interests us in the least.”

- As previously mentioned, both the insurance and media sectors — two of Buffett’s longtime faves — appeared to be overpriced in 1986. This, no doubt, contributed to Berkshire’s inability to find bargains on the open market.

On the post-Buffett era

32.“In the event of the proverbial truck \[running me over\], Berkshire’s structure, holdings, and policies would continue intact for a long, long time. There would be no surprises for operating or portfolio managements. In the short run, Charlie Munger would take over.”

- Munger added: “In the long run, we’d look for someone as much like a young Warren Buffett as possible.”

- Funny moment from the _OID_ report: Buffett mentioned how the stock price of Resorts doubled in the immediate aftermath of its CEO’s death — and predicted that the price of Berkshire would rise, too. “However, I’d be upset if it increased more than 25% or 50%,” he laughed. Munger scoffed: “The hell you would! You’d love it!”

- In a later interview with the _Omaha World-Herald_, Munger said that operating companies had nothing to fear if Buffett passed away. “People have sold \[their businesses\] to us expecting to operate in a certain kind of culture — and that would continue.”

On whether or not social issues affect Berkshire’s investment choices

33.“We like to buy in with people we like. We don’t get in where we are uncomfortable.”

- This specific question was in relation to investing in apartheid-era South Africa. Buffett explained that while Berkshire did not own any South African companies, such social concerns would not stop any potential investment decision.

On institutional interest in Berkshire (or the lack thereof)

34.“They look in the house, but they don’t want to enter. We don’t attract much institutional interest. We have smarter, more rational, and a stabler group of shareholders than if the institutions bought our stock.”

On the savings-and-loan industry

35.“\[We\] don’t like the business, as such. \[It’s\] not a very good business, given the risks involved. In a world where all liabilities are guaranteed by the government, the least credit-worthy can issue paper just the same as the most credit-worthy. \[There’s\] just too much pressure for the participants to do the wrong thing.”

36.“A lot of people aren’t properly reserved for the risks they’re taking. Like an earthquake insurer in a year where there are no earthquakes.”

On the Bowery Savings Bank

37.“It’s a good gamble. This is as low-tech as you can get.”

- Munger fielded this question about one of Berkshire’s more obscure investments. In 1985, Berkshire banded together with Richard Ravitch (Metropolitan Transit Authority) and Laurence Tisch (Loews) to purchase the beleaguered Bowery Savings Bank of New York. Berkshire invested $20 million for 20% of the bank, which had gotten into trouble when interest rates spiked in the late 1970s. The group sold Bowery two years later for $200 million — a tidy profit for all involved.

38.“\[It’s\] basically a venture capital deal.”

And a couple other meeting-related details

- Warren Buffett’s annual letters were already a cult hit in investment circles by 1986. That year’s letter needed a second printing after the initial supply of 15,500 got snapped up. An extra 2,500 were hurriedly printed and sent out.

- Just ten years earlier, Berkshire printed only 2,000 total copies of the letter.

- Buffett sipped on Cherry Coke throughout the meeting, leading one shareholder from Atlanta to compliment him on his soft drink selection.