1996 Berkshire Hathaway Annual Shareholders Meeting - Warren Buffett & Charlie Munger

Warren Buffett opens the 1996 annual meeting with record attendance of approximately 5,400 shareholders. The main business is voting on the Class B share issuance, which Buffett explains is a defensive measure against unit trusts that would charge high fees. The B shares will have 1/30th of the economic rights and 1/200th of the voting rights of Class A shares. Buffett emphasizes this is not about raising capital but protecting shareholders from promoters creating high-fee investment vehicles.

Extensive Q&A session on the mechanics of Class B shares. Buffett explains the pricing will be set Wednesday night, shares will list Thursday morning on NYSE with specialist Jimmy Maguire handling both A and B. The round lot will be 10 shares but individuals can buy as few as 1 share. Key point: the B cannot trade much above 1/30th of A because of arbitrage - A holders can convert to B but not vice versa. Buffett designed this specifically to discourage unit trust promoters.

Buffett explains the concept of intrinsic value and why it matters more than book value or PE ratios. He uses Coca-Cola as an example - many thought they were overpaying for buybacks based on mechanical metrics, but those who understood the business knew it added value. Similarly, Berkshire's GEICO stake went from 33% to 50% over 15 years purely through share repurchases. Buffett emphasizes there's no simple formula - you must understand the business.

Discussion of Wells Fargo's expensive traditional branch system and their innovative moves into supermarket branches and online banking. Buffett notes that Wells has been a leader in both areas using different formats. While banking has no secret formulas like Coca-Cola's 7X, there is significant advantage in being first and learning more about different distribution methods. However, competitors can copy anything in banking.

Buffett candidly discusses World Book's struggles as the encyclopedia business transitions to electronic delivery. Sales and profits have declined significantly as customers move to CD-ROMs and online sources. Buffett states unequivocally they will not sell World Book but are 'groping' to find a configuration that produces decent profits. Charlie notes some business declines are unavoidable - Blue Chip Stamps went from $120 million in annual sales to $200,000.

In response to a question about discount rates for intrinsic value calculations, Buffett explains they use the long-term government bond rate and do not add a risk premium. The purity of the idea is that future cash has the same value whether it comes from a risky or safe business. The risk should be reflected in your ability to estimate future cash flows, not in adding arbitrary percentage points to the discount rate. If you can't estimate it well, don't invest.

Buffett outlines the succession plan for after he's gone. The role will likely be broken into two functions: someone in charge of investments and capital allocation (he mentions Lou Simpson), and someone in charge of operations. Both people are already in the organization. This mirrors GEICO's successful co-CEO structure with Lou Simpson running investments and Tony Nicely running underwriting. Charlie emphasizes the existing assets have large momentums in place - Coca-Cola will keep selling, GEICO will stay intelligent.

Charlie Munger delivers a blistering critique of Modern Portfolio Theory, calling it 'twaddle' and saying it involves a 'type of dementia I can't even classify.' Buffett adds it has no utility except telling you how to do average, which anyone can figure out in fifth grade. The elaborate Greek letters make you feel you're in the big leagues but add no value. Munger notes if Buffett's simple approach were taught, the whole course could be done in a week, which wouldn't serve the interests of the 'high priests.'

Buffett addresses the trend of corporate downsizing, noting that every industry at all times seeks greater efficiency. Historically, farming downsized from a large percentage of the workforce to very small, releasing people to do other things. While efficiency is in society's interest, execution has sometimes lacked empathy and sensitivity. Buffett notes some recent media attention may be a fad based on dramatic examples. He doesn't think current displacement is higher as a percentage of labor force than 10 years ago.

When asked about emerging markets, Buffett notes Berkshire is heavily invested internationally through Coca-Cola (80% of profits from international) and Gillette (about 70% international). These companies have distribution systems, recognition, and are maximizing what they have going for them internationally, unlike 20 years ago when they let it go by default and fooled around with diversification. Charlie suggests doing it indirectly as they have, one can argue they do it better than if they did it directly.

Buffett discusses the troubled USAir preferred investment, calling it a mistake but noting it looks considerably better than 18 months prior. The fundamental problems remain - costs are relics of a regulated, protected environment and they're not in that environment anymore. New CEO Steve Wolf is focused on addressing these issues and has a good record, but costs must be corrected. Charlie notes it's 'plainly worth a lot more than it was last year.'

Asked where Berkshire's cash sits between investments, Buffett explains they're extremely conservative with short-term money. They only have 4-5 approved commercial paper names, currently holding maybe a billion and something in short-term treasuries. He recounts the Penn Central lesson: they paid a quarter point extra, then defaulted. If you came over on the Mayflower reaching for that extra quarter point, you'd be behind after that one mistake. He doesn't like businesses where you can do right for 300 years and one mistake puts you behind.

Buffett and Munger discuss their reading habits. Buffett has been playing bridge on computer about 10 hours a week, cutting into reading time. He recommends The Intelligent Investor with chapters 8 and 20 being essential - they contain all the important ideas in investing (there are only about three ideas). He also recommends Phil Fisher's first two books from around 1960. Munger discusses reading biology, particularly Dawkins' 'The Selfish Gene' and 'The Blind Watchmaker,' calling them marvelous and noting the unlearning is harder than learning.

Buffett questions whether bank mergers actually create efficiency, noting the Bank of Granite in North Carolina earns 2.58% on assets with only $400-500 million in assets - far more efficient than larger banks that merge. CEO Mr. Forlines just focuses on doing the right things day after day. Similarly, Gene Abegg ran a bank in Rockford with way less leverage, lower loan losses, and superior returns without any magic - he just didn't do anything that didn't make sense. Buffett compares it to investing: you don't have to do anything very smart, just avoid doing things that are ungodly dumb.

Buffett closes by reiterating his investment philosophy's simplicity. There's nothing complicated about understanding Coca-Cola, Gillette, or Wells Fargo. The key is staying within your circle of competence and having managers with no ego compulsions forcing them into action. If something isn't logical to do, pass on it. Berkshire will continue to focus on businesses they understand and finding managers who run them right. He thanks everyone for coming and notes they've had a good time over the weekend.