Fun and Games with Berkshire

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Published May 2, 2010Published Monday May 3, 2010

Fun and games with BerkshireBy Steve JordonWORLD-HERALD STAFF WRITER

MATT MILLER/THE WORLD-HERALD

Warren Buffett entertains shareholders with a game of bridge Sunday during annual Berkshire Hathaway events at Regency Court shopping center inOmaha.

The financial industry needs regulation to control the innate human tendencies of greed and envy, Warren Buffett and his longtime businesspartner, Charlie Munger, said Sunday at the end of their Berkshire Hathaway Inc. shareholders' weekend.

Munger, vice chairman of Berkshire, likened some of today's Wall Street activity to a circus where the tiger has gotten loose and is acting lik

a tiger. The solution, he said, is not to beat up the tiger but rather to improve the tiger-trainer so the animal will be under control.

At the same time, he and Buffett, chairman and CEO of Omaha-based Berkshire, continued their defense of New York City's Goldman SachsInc., which they said is the best investment banking firm in the country and the one least involved in casino-like dealings.

It's up to Congress, the two men said during a press conference at the Omaha Marriott hotel, to enact laws that will restrain Wall Street firmsfrom what they called high-IQ asininity.

That's when smart executives ignore common sense and good judgment and make decisions that lead to disaster, not just for themselves but fothe entire economy, Buffett said.

He and Munger also discussed a wide range of topics, including how to choose someone to eventually assume Buffett's investment decision-making, the chances of big railroad mergers and, according to Munger, the need for China to end corruption and discourage excessive gamblinamong its people.

Buffett and Munger had the 100 or so journalists and others at the press conference laughing at times. Early on, Buffett bit open a plasticwrapper so the two could snack on peanut brittle. Munger drank diet Coca-Cola, and Buffet drank regular Coke.

They repeated some of their regular jokes. Munger said envy is the worst of the seven deadly signs because you can't have any fun doing i

You take gluttony and lust, and you can have a hell of a weekend, Buffett said.

Still cameras supposedly were banned from the 2-hour press conference, but some journalists took snapshots anyway before a Buffett aide tthem to stop.
mailto:[email protected]:[email protected]


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Among those attending was Fortune writer and editor Carol Loomis, who also edits Buffett's annual letter to shareholders.

The press conference followed a festive day for Buffett, including a brunch attended by Berkshire managers, a few table tennis shots with U.Sunder-20 champion Ariel Hsing of Milpitas, Calif., and a few hands of bridge with his regular partner, Susan Ogborn, and Berkshire executivAjit Jain.

About 800 people watched the table tennis, many of them sitting in bleachers erected in the Regency Court shopping center courtyard.

After losing some quick points to Hsing, Buffett pulled out a paddle that extended nearly the width of the table, but he had no better luck. A fdozen Berkshire shareholders took turns against Hsing and then posed with Buffett for pictures.

At the press conference, Buffett said Wall Street's legitimate task is supplying capital to businesses that will use it wisely and add to theeconomy, but a lack of financial regulation allows what amounts to gambling.

He said he warned in 1982 that a proposal in Congress to allow people to profit from short-term trading on credit amounted to gambling andshouldn't be allowed, but it passed anyway and still is in effect today.

People on Wall Street are rewarded for dancing around the rules, he said, until a disaster happens. He likened the situation just before the2008 financial crisis to Cinderella's ball at 11:50 p.m.

People knew that eventually the party would revert to pumpkins and mice, he said, but were having so much fun that nobody wanted to qui

In the end there is a disaster, he said.

Munger said permissiveness and stupidity created a dysfunctional system of regulation that eventually hurts the economy.A prime example, he said, is that a 200-person government agency was responsible for making sure that mortgage giants Freddie Mac andFannie Mae acted properly but totally missed the two government-backed companies' financial mismanagement.

Calling the situation astounding and insane, Munger said, What we need to do is change the whole damn system.... If I was writing thisas a satire, nobody would believe it.

He said virtually all the nation's investment banks except Goldman Sachs were making deals that would make you throw up in the gutter.

Buffett said Berkshire purposely doesn't buy insurance to cover the actions of its officers and directors, a practice of many corporations toprotect against lawsuits. Serving on the board of a corporation carries rewards, he said, and there ought to be a downside.

One of the bad results of the 2008 financial crisis was that executives and directors of the large companies that failed, while they lost money,still ended up very, very rich while ordinary shareholders were wiped out and average people lost their jobs, Buffett said.

Buffett and Munger also said the accounting profession did not meet its responsibility of correctly evaluating companies' finances and reportinthe accountants' findings. Accountants are beholden to the companies which they are supposed to examine, Buffett said, and would not tellCEOs the truth about their finances.

Munger put it more bluntly, saying accountants should act like real men instead of dishonorable twits.

On another topic, Buffett said he continues to evaluate potential successors for his investing role at Berkshire.

He said in 2008 that four money managers were candidates, and Saturday he said there were at least two people who might fill the role. He hanot named any of them.

Qualified people are available, and the task of succession is no more difficult than he thought, Buffett said.

Said Munger, I'm quite sure that problem would be solved.

Munger said a common pattern among some highly intelligent people is that they make one asinine decision after another.

A classic example, he said, was Long-Term Capital Management, an investment company that failed in 2000. Because its leaders knew theywere smarter than anyone else, especially in mathematics, they didn't know the limits of their abilities, Munger said.

He also cited Sir Isaac Newton's passionate interest in alchemy, the belief that ordinary metals could be turned into gold.

He was a boob, Munger said.


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Buffett said China is growing rapidly because it has opened its economy to its people.

He recalled a trip to China in 1995 with Microsoft founder Bill Gates. The two were traveling on a river, where a crew of Chinese men had ttask of pulling their boat across the sandbars.

One of them could be another Bill Gates, and we'd never know it, Buffett said he told Gates, because the Chinese system did not give peopa chance to advance.

But now, Munger said, China is tapping the potential of its people, and he said a single-party government that favors capitalism may be the bsystem for China, rather than a U.S.-style democracy.

Calling himself a right-wing capitalist, Munger said China's leaders encourage capitalism and recognize individual merit.

That's my kind of Communist, he said.

Buffett said China's leaders have seen that capitalism succeeds and are likely to encourage more. The country's stock market is likely toexperience the usual boom and bust cycle that goes with capitalism, Buffett said, although he doesn't know when that would happen.

On other topics:

Munger, who convinced Buffett that Berkshire should invest $232 million in the Chinese battery and auto company BYD Inc., saidachievements by BYD CEO Wang Chuan-Fu made it obvious that he was an extraordinary business person and that his company wouldsucceed.

Buffett said his first advice to someone who wants to sell him an excellent business is to keep it. The cash isn't better than your business,he said, and something must be done with the money, too.

But some people want to sell their businesses anyway for reasons such as family succession, he said, and in that case Berkshire is the best bubecause he lets the managers who love the business continue to run it as if they still owned it.

Mergers among the four biggest U.S. railroads Burlington Northern, Union Pacific, Norfolk Southern and CSX are unlikely, althoughsomething could happen to the Kansas City Southern. Berkshire bought Burlington Northern Santa Fe Corp. earlier this year.

Toyota's had a setback, Buffett said, adding that with all good companies it's going to happen from time to time. The company willsucceed far beyond my lifetime, Buffett said. Munger said, The merits of Toyota have not disappeared. It's a great company and will remaa great company.

Buffett said he and Munger can decide quickly whether a company is headed by a person who has passion for the business and the strongcharacter needed to fit into Berkshire, often within two or three minutes in a telephone call. It's nothing complicated, Buffett said. Mungercalled it a useful knack.

Buffett said he owns 100,000 shares of Munich Reinsurance, a German company. Berkshire Hathaway owns about 3 percent of the companshares.

Buffett said recommendations from the newly formed commission on government spending, headed by Alan Simpson and Erskine Bowlesare bound to be unpopular because the only options are to cut spending and raise taxes, or a combination of the two. Yet something must bedone, he said. It will be interesting to watch.

The Federal Reserve will have to raise interest rates eventually and it will be difficult to decide when and by how much. Buffett repeated hendorsement of Fed Chairman Ben Bernanke, and said the country is better off because of the steps Bernanke took to head of economic collain 2008 and 2009.

Buffett plans to visit Japan on his trip to Asia next March, which would include stops in India, China and South Korea. But that doesn't me

he is looking specifically to make investments in those countries. Munger said Japan has acted with civility and decency after 20 years offinancial stress, and he doubts the United States would have handled similar economic problems as well.

South Korea's Posco steel company, in which Berkshire has an investment, is the best in the world because it received its technology fromJapan, Munger said.

Munger, a resident of California, said that state's legislature is the worst in the country, largely because its election districts have been drawnso that people can elect only left-wing and right-wing wing nuts, and there are only about a half-dozen sensible moderates.

On the other hand, Munger and Buffett said, California also has advantages, among which are its climate and influx of talented Asians.


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We can stand a huge amount of idiocy, Munger said.

It's a fabulous place, said Buffett, who has owned a home in California for years.

Contact the writer:

444-1080, [email protected]

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Fun and Games with Berkshire