1987 Annual Meeting1987 年度股东大会

Nevertheless, I’m back today with everything that I can find on Berkshire’s 1987 AGM.

This certainly cannot claim to be the definitive account of the ‘87 meeting. There are, no doubt, holes big enough to drive a truck through. But, absent a time machine, it’s the best I can do to compile all of the available information from that day.

I very much hope that this will prove helpful to Berkshire students far and wide.

On May 19, 1987, 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 to three hours.

The _Omaha World-Herald_ noted that “Buffett constantly made humorous remarks while consuming Cherry Coke” — which, I must admit, is a pretty apt description of these Q&A sessions.

Well, without further ado, here’s everything that I could dig up from this (very) early episode of the Warren & Charlie show…

(1) Will Berkshire Hathaway ever split its stock?

(1)

“I have a stockholder friend of mine who is 60,” said Buffett. “I just sent him a telegram on his birthday that said, ‘May you live until Berkshire Hathaway splits.’”

The implication being, of course, that it never will.

If only immortality could be won so easily.

Buffett’s reluctance to split the stock was the same then as it is today. Berkshire already has the exact group of patient, long-term shareholders that he wants — and it’s “a hard group to upgrade”.

(2) Would splitting the stock help Berkshire get listed on the New York Stock Exchange?

(2)

Back in 1987, Berkshire’s stock was traded on the over-the-counter market. At least in part because its unusually large share price (already north of $3,000) all but ruled out inclusion in the NYSE.

“A couple of people from the New York Stock Exchange came out three or four months ago \[to try to convince me to list on the NYSE\],” Buffett told shareholders.

In those days, stock was typically purchased in 100-share “round” lots — which would be prohibitively expensive at Berkshire’s lofty price. And, if someone wished to buy a smaller amount (known as an “odd” lot), they got nickel-and-dimed with extra fees.

So Buffett asked the NYSE to allow Berkshire to sell 10-share round lots as a compromise. “The New York Stock Exchange wants us,” he said, “but not the 10-share round lot. It wouldn’t work as 100 share trades.”

He sounded like he preferred the sedate pace of OTC anyway. “The less stock traded,” he said, “the better job we’ve done. That’s not an attitude the NYSE likes.”

- The New York Stock Exchange agreed to Berkshire’s terms the following year and the Omaha-based conglomerate officially joined the Big Board on November 29, 1988 — with 10-share round lots instead of 100.

(3) Are there advantages to spinning off parts of Berkshire?

(3)

“I don’t think it’s easier to administer two public companies instead of one,” said Buffett.

(4) Will you repurchase shares to boost Berkshire’s value?

(4)

“It would have to be significantly discounted from its intrinsic value,” said Buffett. “Berkshire’s stock trades close to its intrinsic value \[right now\].”

If that were to change, he said, “we’d repurchase some stock — but we don’t want that to happen.”

(5) Did your advertisement in the _Wall Street Journal_ last year lead to any deals?

(5)

In 1986, Buffett placed an ad in the _Wall Street Journal_ in search of companies to acquire — because tax changes coming at the end of the year made it a particularly advantageous time for owners to sell. He sought businesses worth at least $100 million and with $10 million of after-tax earnings.

And while he got a lot of responses, the vast majority were not a fit. “If you run an ad for a chihuahua,” said Buffett, “you get a lot of collie replies.”

(An example of a “collie reply” was the Mississippi woman who tried to sell Berkshire her antebellum mansion. Or the man who wanted to offload his NYC newsstand.)

Buffett admitted that about five of the responses intrigued him, though none led to a deal. Nevertheless, he hoped that the advertisement made an impression on would-be sellers and might pay off down the line.

“The ad cost $47,000,” he said. “The _Wall Street Journal_ is expensive. Even though it didn’t work, people will remember the ad.”

Until then, though, Berkshire would go back to business as usual. “We have a sophisticated acquisition policy,” Buffett said. “We wait for the phone to ring.”

(6) What kind of businesses are you looking for?

(6)

“I’d like to buy something for a penny, sell it for a dollar, and have it be habit-forming,” he laughed.

Sadly, such unicorns are few and far between. “I don’t find any stocks that are attractive to me \[right now\].”

(7) Would you invest in a foreign corporation?

(7)

“We had a few inquiries from Canada,” he said, “but it’s unlikely we’ll buy anything outside the United States.”

(8) What’s going to happen with inflation?

(8)

“At some point,” said Buffett, “we will see lots of inflation. We will not profit from it — and we’ll try not to be destroyed by it.”

He believed that the U.S. government would continue to print more money as needed, thereby fueling further inflation. “If you had a printing press in your basement and you had some problems, you might slip down there occasionally \[too\],” he said.

(9) What is your position on protectionism?

(9)

Buffett referred the questioner to an op-ed that he wrote earlier that month for the _Washington Post_. In it, he proposed a “plan that will promptly eliminate the trade deficit but leave us free of most of the problems that quotas and tariffs produce”.

His plan called for the creation and use of Import Certificates that would be issued to exporters based on the value of their exports. And any company seeking to import goods from overseas would need to purchase an equal amount of these ICs from the exporters. Voila, a trade balance.

“In 1626, we made one of our better moves,” he wrote. “Encountering some consumption-oriented locals, we swapped a few trinkets for ownership of Manhattan Island. Now, we’ve begun reversing the process. We should stop this foolishness promptly — and ICs will do the job.”

(10) What are your views on the insurance business?

(10)

In 1986, Berkshire’s insurance operations achieved a combined ratio of 103% — pretty good for that era’s high interest rate environment — but there were ominous signs that increased capacity throughout the industry would soon drive down prices.

And that’s exactly what happened.

Berkshire’s insurance volume dropped by 35% in the first quarter of 1987 — and Buffett expected the situation to worsen in the coming years. “The \[insurance\] business is becoming intrinsically less profitable,” he said.

(11) Do you think executive compensation at Berkshire is too high?

This question seemed mostly aimed at insurance chief Mike Goldberg’s $2.2 million total compensation (salary and bonus) in 1986.

“Mike’s compensation relates to the business under his control,” said Buffett. “I pulled it down — and he pulled it up. Our compensation reflects that.” (A joke at the sizable difference between Goldberg’s multi-million-dollar pay package and Buffett’s customary $100,000 salary.)

“Mike’s not the only one up there,” he added. “The figures can’t get too big as far as we’re concerned.”

Buffett has said elsewhere that he never minds writing a big check for outstanding performance. In fact, it’s the managers who muddle along in mediocrity — never earning lucrative bonuses — that really bother him.

(12) What is the long-term plan for Berkshire?

(12)

“We have no interest in selling or merging,” said Buffett. “We have no end-game strategy. Charlie and I have fun. We like the people we work with.”

(13) What do you think will happen in the stock market?

(13)

By 1987, Berkshire’s stock cupboard looked pretty bare. Buffett and Munger had sold almost all of their non-permanent holdings because of the frothy market and invested the proceeds in tax-free bonds.

It was a time of all greed and no fear on Wall Street — which has never been Berkshire’s kind of market. Killer timing, too, with the Black Monday crash just a few months away.

Berkshire hung onto its primary holdings of Capital Cities/ABC, the Washington Post Co., and GEICO — along with a smaller arbitrage position in Lear Siegler.

“I’ve been around for 40 years and I don’t know how to forecast the market,” Buffett admitted. “We’re going to hold our stocks even if the stocks go down 50%. \[If it’s\] psychologically impossible for you to own stocks that fall 50%, don’t own them.”

(14) How do you feel about those caught insider trading?

(14)

“You can’t put them away long enough,” said Buffett. “We applaud what the SEC is doing.”

And then Charlie chimed in: “When incredible rewards go to the casino operators, it is extremely unlikely that civilization has reached nirvana.”

(15) What will happen to Berkshire when Warren Buffett dies?

(15)

It’s kind of crazy to think about, but Buffett has spent over two-thirds of his life answering questions about his death. In one of his early partnership letters, he admitted that people were already asking him — at scarcely thirty years old — what would happen to their investments if he died.

At the 1987 annual meeting, he gave his usual response: His untimely death should not upset the applecart at Berkshire. And, if the stock did drop after he passed away, it would be a strong buy for long-term investors.

After all, Berkshire would be left in safe hands. “Charlie would run things,” he said.

That answer stirred Charlie and the vice chairman quickly reassured shareholders that the Buffett family was well known for its longevity. To prove his point, he motioned towards Buffett’s 83-year-old mother who was seated in the crowd.

(16) Do you plan to open more See’s Candies stores?

(16)

Buffett pointed out that See’s does most of its business during the Christmas season — which leads to long lines at stores. Which, in turn, leads customers (and some shareholders) to grumble that more locations should be opened to capture this demand. But, Buffett warned, while such a strategy might alleviate those holiday lines, it would prove uneconomical the other eleven months.

“We only make money \[at See’s\] when people are inconvenienced,” he said.

I’m guessing that this somewhat cryptic line means that See’s makes its money during short bursts of high demand (when lines are long), but would lose money with more locations (and shorter lines) because of uneven seasonal demand.

(17) Why did Buffett buy ServiceMaster stock for his personal portfolio and not for Berkshire?

(17)

In 1986, Buffett personally purchased 5.1% of the Chicago-based maintenance and cleaning service company for between $35-40 million.

The company had recently switched from a corporation to a limited partnership — which inspired Buffett’s investment. “ServiceMaster is more attractive for an individual due to the tax consequences,” he said.

(18) Can you talk about the precision (or lack thereof) in business and economic forecasts?

(18)

“\[Some business leaders practice\] false precision,” said Buffett. “That’s a real problem. A CEO says the hurdle rate is 15%, so they work out the rate to be 15.1%. Business is not that precise. We like numbers, but we don’t try for pinpoint precision.”

In other words, when you carry projections out to three decimal places, it’s way too complicated (and probably wrong to boot).

From the _University of Berkshire Hathaway_:

Munger added that the worst mistakes are made from the nicest graphs and what is really needed is “enlightened common sense”.

(19) What’s going on with Berkshire’s new corporate jet?

(19)

Berkshire purchased a used corporate jet in 1986. A move so out of character for the thrifty Buffett that he poked fun at himself by announcing it in super-tiny print in that year’s annual letter. Over time, he came to cherish the jet — rebranding it from The Indefensible to The Indispensable.

But, in 1987, it was still quite a curiosity for Berkshire shareholders. The _World-Herald_ reported that Peter Kiewit Sons’ took care of the jet when not in use. “Anything that Kiewit does,” said Buffett, “it does well.”

(20) Do you recommend John Train’s new Buffett biography,The Midas Touch?

(20)

“I’m not sure you’ll get your $18 worth,” said Buffett. “The last time I talked to John Train was 12 years ago.”

In another interview, he said: “I hate to see people shell out $18 for old stuff.”

Train had interviewed Buffett for _The Money Masters_ — and then later cobbled together parts of that interview and other publicly-available information for _The Midas Touch_ in 1987. In fact, he only used excerpts from Buffett’s letters from 1976 or earlier — because the Berkshire chief started copyrighting them after that.

(This might also explain why the collection of annual letters on Berkshire’s website starts with 1977. That has always puzzled me.)

And a couple of other odds and ends…

- The _University of Berkshire Hathaway_ notes that Charlie Munger said that Cap Cities CEO Tom Murphy — a devout Catholic — prayed every day for humility. Charlie then joked about his own apparent lack of the humble gene. He added that someone who slightly underestimates his own ability will go farther than a highly intelligent person who thinks too much of himself.

- A stockholder from New York City said that while Buffett often praises Berkshire shareholders for their patience and long-term outlook, the same goes in reverse. “\[Berkshire\] management is a different breed,” he said, “and we’re grateful to you for being unique \[and\] for your modest compensation.”