Berkshire Hathaway Annual Meeting 2000 - Full Q&A with Buffett & Munger

Buffett acknowledges ending millennium with only 0.5% return. Nothing magic about one-year measurement periods - had down half-years before. Will have down years in future, it's been fluke not to have them. Stock price fluctuations often unrelated to intrinsic value.

Buffett admits capital allocation job in 1999 was very very poor. Coke and Gillette had bad years but still calls them 'inevitable' - higher market share than ever. Gillette 70% of blade/razor business, Coke 50% of soft drinks with 1B servings/day. Berkshire benefits from 80M Coke servings/day and 6% of global blade business.

Charlie notes during pretty much entire period Berkshire owned marketable securities exceeding its net worth - extraordinary liquidity in well-performing company. That advantage hasn't gone away, been augmented. They're prepared - just give them reasonable opportunities.

Buffett explains risk assessment: think about what can happen 5-10-15 years from now to reduce economic strengths. Every business is economic castle - millions trying to take it with capital. Question is what kind of moat protects it. See's candy example - Chuck Huggins widens moat every year with crocodiles, sharks, piranhas. Want moat widened every year - primary criterion of great business.

Unicover situation discovered February 1999, $275M mistake. But Buffett notes mid-70s mistake whose present value is $8-9 billion (cost less than $4M at time) - that one cost Berkshire being worth at least 10% more today. In insurance you will get surprises - test of good management is how many you get.

Charlie's 'willful agnosticism' concept - don't try to predict interest rates or foreign exchange, won't determine if get rich long-term. Best time to buy stocks was early 80s when prime rate hit 21.5% - appeared attractive to hold treasury bills but wrong. Willful agnosticism makes them concentrate on certain things - good way to think if lazy.

Buffett praises M&T Bank CEO Bob Wilmers as terrific businessman, banker, citizen. Runs kind of bank letting them sleep comfortably. 'More banks than bankers' but Bob is real banker. Has one of largest ownership positions among 100 largest US banks, achieved largely by buying with own money (not options). Very comfortable investment, expect to own 10 years out.

Charlie promotes Buffett's Fortune article sent to shareholders - must reading, read 2-3 times. Ideas sound simple but world more complicated. In for reduced expectations on stock returns. Buffett says mildly reduced equities as prices got full, don't think general equity ownership exciting next 10-15 years. Will buy more businesses relative to marketable securities going forward.

Charlie's philosophy: if you have very unreasonable expectations of life, makes life much more miserable. Much better to get expectations within reason. Much easier to reduce expectations to reasonable level than to get superhuman achievements. Buffett's kids almost delirious when heard they were getting $300 each.

Buffett's dividend philosophy: test is whether they can create more than $1 market value for every $1 retained. If so, foolish to pay out (forget taxes). To date felt retained dollars become worth more than $1 on present value basis. Over time get objective test. If changed would return money via repurchases or dividends. Never have conventional dividend policy (20-30% of earnings) - no logic to it whatsoever.

Charlie notes Buffett's dividend philosophy isn't taught at leading business schools, economics departments, or by corporate finance professors. Basically saying they're right and all of academia is wrong. Charlie deadpans: 'We love it when we do that.'

Buffett praises Philip Fisher as terrific mind with classic books from early 60s. Visited his tiny San Francisco office 40 years ago. Fisher articulated two reasons to sell: (1) discovered mistake in analysis - company not what you thought, (2) something changed within company like management, no longer meets original criteria.

Buffett and Charlie rail against CEO employment contracts and compensation consultants. Corporate America crazy to do it - sold by damn consultants. Berkshire has no contracts, perfectly easy to run without them. Never seen compensation consultant reduce costs. Not market system - CEO compensation not subject to market tests. Institutional shareholders could change it but spend time on peripheral corporate governance rituals. Berkshire yet to hire compensation consultant, yet to lose important manager.

Buffett admits no good on macro, proven by worrying too much about inflation for 20 years. Good thing about his economic predictions: pays no attention to them himself. Don't get into macro when picking investments - never enters discussion with Charlie. Banks cut economics departments in mergers - wonders why had them in first place. If Berkshire ever gets economics department, sell the stock short.

Buffett on role models: pay to have right ones. Lucky to have heroes early that never let him down. You copy people you look up to especially at early age. Everyone starts with parents as models. Tells students pick person you admire, write reasons why, figure out why you can't have same qualities. Qualities of personality/character/temperament can be emulated. Got to start early - tough to change later. Not complicated - Ben Graham and Ben Franklin did it. Charlie adds: no reason to look only for living models.