Berkshire Hathaway 2019 Annual Shareholders Meeting

Warren Buffett opens the 2019 annual meeting with introductions of directors and a detailed explanation of Q1 2019 earnings. He warns shareholders about misleading GAAP accounting rules that require unrealized gains/losses in bottom-line earnings, emphasizing they should focus on operating earnings instead. He also addresses the unusual absence of Kraft Heinz equity earnings in the quarter.

Discussion of precision scheduled railroading (PSR) that has been adopted by CSX, Norfolk Southern, Union Pacific and Canadian Pacific. Warren explains BNSF is studying these approaches carefully but will only adopt if customer service can be maintained while improving efficiency. Charlie tersely notes BNSF will decide when the time is right.

Warren addresses Wells Fargo's fraudulent account scandal, explaining how improper incentives led to creation of millions of fake accounts. He discusses the difference between this situation and his vigorous public response to Salomon Brothers' misconduct years earlier, noting the complexity of addressing systemic incentive problems versus individual trader misconduct.

Warren recounts his best investment - buying Delta Duck Club shares for $29,000 that discovered oil and were later worth $2-3 million per share. Charlie shares his story of buying an oil royalty for $1,000 that paid $100,000 annually, and turning down 5x as much Belridge Oil stock that went up 30x - calling it the dumbest decision of his life.

Warren clarifies that Berkshire has never made political contributions in 54 years, though regulated subsidiaries have PACs for access. He distinguishes between personal political beliefs and corporate positions, declaring himself a 'card-carrying capitalist' while supporting appropriate regulation and social safety nets. He addresses concerns about socialism among Democratic candidates.

Warren explains Berkshire's healthcare initiative with JP Morgan and Amazon, noting healthcare costs have grown from 5% to 17-18% of GDP while federal spending stayed at 17%. They hope the private sector can deliver major improvements, as Warren generally believes the private sector does better than the public sector on most things, though acknowledges government has a role.

Detailed explanation of why Berkshire typically keeps ownership below 10% of companies. Warren explains the short-swing profit rule requiring disgorgement of profits from trades within 6 months, plus mandatory public disclosure within 2-3 days. For banks, Federal Reserve approval adds another layer. These rules significantly restrict flexibility and increase execution costs.

Warren admits they paid too much for Kraft - about $50 billion - despite the business operating well. He distinguishes between the Heinz acquisition (appropriate price) and Kraft portion (overpaid). Explains how paying too much can turn any investment into a bad deal, contrasting with his early career buying cigar butts cheaply.

Discussion of online furniture retailers like Wayfair and their impact on Berkshire's furniture operations. Warren reveals Nebraska Furniture Mart does significant online sales with many customers picking up in-store. Despite Q1 weakness across all four furniture operations, NFM did $9.3 million on shareholder weekend with only $2,500 in paid-in capital.

Response to pension fund manager about private equity and alternative investments. Warren explains how leverage magnifies returns but notes current environment has weak covenants and high multiples. He points out that leveraging an index fund with staying power would have produced extraordinary returns, but warns about liquidity risks in closed-end funds.

Warren candidly admits missing the Google investment despite seeing firsthand at Geico how effective and profitable their advertising was. They were paying $10 per click for something with zero marginal cost to Google and could see it working but still didn't invest. Warren suggests maybe Apple was their atonement for this mistake.

Comprehensive explanation of Berkshire's insurance float and why it's so valuable. Warren describes the $124 billion as money people have given them that gets regenerated over time, like having a bank where people deposit and never withdraw. He explains why standalone reinsurers need excessive capital and notes all three largest reinsurers came close to extinction in the past 30 years.

Warren explains how Todd and Ted expand Berkshire's investment universe by bringing deal flow from their networks and contacts. While not critical in recent bull markets, they would be enormously valuable during market chaos when opportunities arise. They enhance Berkshire's ability to respond quickly when conditions get chaotic.

Charlie delivers a scathing critique of Bitcoin after being invited to a Bitcoin happy hour. He jokes they celebrate the life and work of Judas Escariot. Warren shares his 1952 honeymoon observation of well-dressed people in Las Vegas doing things they knew were mathematically dumb, saying Bitcoin has rejuvenated that feeling.

Discussion of how understanding human behavior improves with age and experience. Warren believes he knows far more about human behavior at 88 than at 25-30. Charlie quotes Lee Kuan Yew's mantra: 'Figure out what works and do it.' They note how they've seen extremes of human behavior in unexpected ways throughout their careers.

Ajit Jain explains how they price unconventional insurance contracts with insufficient data - using historical analysis, judgment, and strict exposure caps. Warren describes post-9/11 situation when Berkshire was one of few who would provide coverage. He credits Ajit with adding over $50 billion to Berkshire's balance sheet through these unique deals.

Warren acknowledges BNSF receives the lowest ton-mile revenue of the six major North American railroads, explaining it's due to longer hauls and freight mix. Union Pacific has improved margins significantly, and while BNSF has a wonderful franchise, Warren believes they should achieve comparable margins to other railroads.

When asked what they value most in life, Warren answers time and love - the two things money can't buy. Both express how fortunate they are to control their time and do work they love. Warren notes that wanting money was about being able to do what they pleased in life, not about houses or boats.

Warren explains why Berkshire doesn't want to promote its stock holdings - at least $150 billion of their $200 billion portfolio is in companies buying back stock, increasing Berkshire's ownership. Telling the world to buy these stocks would only make buybacks more expensive, costing Berkshire money. Holdings are filed quarterly as required.

Detailed comparison of Geico and Progressive. Ajit explains Geico has a 7-point advantage on expense ratio but Progressive has a 12-point advantage on loss ratio, giving Progressive a net 5-point edge. Geico is working hard to close the loss ratio gap while maintaining expense advantage. Warren expects both to continue gaining share from the industry.

Response to question about building circle of competence in today's more competitive environment. Warren recommends extensive reading, learning about as many businesses as possible, and being realistic about competence boundaries. He shares how meeting Lorimer Davidson in 1951 opened up insurance understanding, while retail never clicked despite working in the industry.

Greg Abel discusses Berkshire Energy's plans to deploy $30 billion in renewable and transmission projects beyond 2020. While Iowa is approaching 100% renewable capacity, PacifiCorp has major expansion plans across six Western states. A transmission project started in 2008 is now being built out in phases through 2023.

Warren acknowledges a shareholder's calculation that investing excess cash in index funds over the past 15 years would have generated $43 billion more value. He agrees it's a rational observation but notes they might have been unable to deploy capital in 2008-09 crisis with that approach. He suggests his successor may adopt a more index-fund oriented cash management strategy.

Discussion of why banking and insurance regulation is necessary despite being occasionally irritating. Warren notes insurance has been regulated since Berkshire entered the business, and while it can be a pain, it prevents charlatans from taking people's money and giving only promises. The 2008 crisis showed what happens when investment banks take excessive risks.

Warren explains his approach to the annual letter, imagining he's writing to his sisters Doris and Bertie - intelligent people with significant Berkshire holdings but unfamiliar with industry jargon. He argues that excessive detail can mislead rather than inform, and the important thing is conveying how management thinks about capital allocation over time.

Warren reflects on how Berkshire's culture is better than ever despite size being a drag on performance. He wrote about this limitation 40 years ago with $40 million and feels it even more with $368 billion. However, the culture is special and Berkshire will be one of the safest ways to make decent money over time, depending on successors.

Warren explains why Berkshire is at a structural disadvantage to index funds due to corporate taxation. Berkshire pays 21% federal tax on capital gains plus state taxes, while index funds have no corporate-level tax and simply pass through to shareholders. This means owning stocks through Berkshire underperforms an index fund on a pre-individual-tax basis.

Discussion of Nevada casinos leaving NV Energy despite paying huge exit fees. Greg Abel explains the economic rationale - casinos can source cheaper renewable power directly and the exit fees help NV Energy invest in replacing that revenue. While initially painful, it's economically rational and similar situations are unlikely in other states with different customer mixes.

Warren enthusiastically describes American Express's competitive advantages, particularly their closed-loop system and premium customer base. Despite starting later than Diners Club and Carte Blanche, they came to dominate the luxury end of the credit card business. Berkshire is glad to own 18% of what Warren calls a fantastic story.

Warren describes the Occidental Petroleum financing - $10 billion preferred with 8% dividend and warrants completed in one weekend. Berkshire's unique ability to commit large amounts with certainty and no material adverse change clauses makes them the natural call for such deals. Warren expresses hope for more similar large transactions in the future.

Warren explains Berkshire doesn't use formulas or extensive spreadsheets for risk evaluation. He notes that committees and analysts tend to tell CEOs what they want to hear, citing examples of ridiculous accounting adjustments and one private equity firm accidentally sending an email instructing their manager to inflate projections by 15% to offset Buffett's expected conservatism.

The meeting concludes with a motion to adjourn from Walter Scott. Warren thanks all attendees and expresses hope to see everyone next year, maintaining Berkshire's tradition of accessible, transparent shareholder communication. The formal meeting follows to elect the 14 directors.