Leucadia 2009 AGM Notes

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2009 Leucadia Annual Meeting Notes

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Sears 2009 AGM Notes

From the Motley Fool Board:

I went to the Sears Holdings annual shareholders meeting on May 4th, and thought i'd share some of what i heard.

First, i will say that i was extremely impressed with Eddie Lampert and left the meeting 100% reinforced that he is one of the smartest people out there.

The meeting was about 3 hours, the first 20 minutes or so, Bruce Johnson gave a presentation on the operating businesses, talked about things like expense control and inventory reductions, and he also highlighted things i had not noticed before, such as the improving performance of comp sales relative to competitors, quarter by quarter. The number of competitors who had comp sales worse than Sears Holdings accelerated dramatically towards the end of last year and Eddie Lampert brought up the point of saying, Which is worse, negative 4% comps four quarters in a row, or flat comps for three quarters and then a single quarter of negative 25% comps, as in the case of Abercrombie.

K-Mart had 1.4 million new layaway customers last year. Bruce Johnson talked about the subsequent purchases that layaway brings as customers visit the stores every two weeks to make payments.

Bruce Johnson talked about market share, saying that Sears Holdings has 34.6% market share in appliances, which leads all competitors, up from 30% in Q3 2007. Said they are reversing years of declines in market share in the appliance category. Eddie Lampert said that while you could sell a heck of alot of $3,000 washer/dryers at $1,500... all you'd essentially be doing is "renting market share" and that they wanted to "own market share".

Market share in other categories mentioned:

22.3% tools
14.2% home repair
21.0% power lawn and garden

The majority of the meeting though Eddie Lampert took questions from the audience. Some interesting points and comments he made were:

Lampert wants to encourage more experimentation, even though it could mean more failures.

He noted that Sears is determined not to make any "serious mistakes" that can put you out of business, he noted ethical mistakes and serious amounts of leverage as two "serious mistakes"

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Live from the Berkshire Shareholders meeting 2009

8:41	The Berkshire Hathaway annual movie has begun. It started with a cartoon of Warren Buffett, Charlie Munger and other executives acknowledging a difficult year in 2008 and pledging to work hard in 2009. Not even Berkshire escaped the global recession unscathed.

8:45

The Qwest Center Omaha is packed to the rafters. The arena seats more than 18,000 people. About 35,000 shareholders are in Omaha this year, many of them spilling out into the exhibition hall at the adjoining convention center. The annual meeting is piped into the hall and other rooms so people can watch and hear it.

8:52

Late night television and other comedians were highlighted in one snippet of the annual movie, joking about the recession and government efforts to revive the economy. One was David Letterman proclaiming it was a good time to buy stocks, playing off Buffett's advice at one point in the crisis. Letterman suggested that instead of that latte you are accustomed to buying, folks should pick up a few shares of GM.

9:03

Another segment has Buffett in Berkshire-owned Nebraska Furniture Mart taking a nap on a mattress, checking "product quality." A manager steps up and tells him the days of sleeping until the phone rings are over, given the stock plunge for Berkshire in 2008. Buffett agrees and tries to sell a mattress to a customer, saying the board of directors suggested he find something else to do. Buffett told the customer it had something to do with a downgrade in Berkshire's credit rating. He gets her to buy a mattress called the "Nervous Nellie," a big seller since the Dow Jones industrials dropped. The mattress features pockets into which can be placed cash and other valuables. The woman goes off to buy the mattress and Buffett takes out all the cash displayed in the mattress, along with a Nebraska Cornhuskers football, magazines and other items. He calls Charlie Munger to set up delivery.

9:17

Viewers of the annual movie learned the history of Geico auto insurance company's advertising icon Gecko. The lizard was not like other gecko's, the story goes, and hung out with a family cutting out coupons to help save people money. Then the Gecko left a note with the family, saying he wanted to strike out on his own, to bigger and better things. His lonely life changed when he received calls from people confusing him with Geico. He visited Geico's offices and the chief of marketing realized the Gecko wanted to help save people money, just like Geico tries to do with auto insurance. Geico sounds like Gecko, and the advertising legend was born.

9:21

Like last year, a comedy sketch is featured this year, with an investment banker interviewed about the complex financial instruments that backed bad home mortgages. Asked what caused the setup to unravel, the investment banker said people started to ask what the mortgages were actually worth. "Oh for the good old days," the banker sighs.

9:24	The annual movie is over.

9:27	Warren Buffett and Charlie Munger have taken their seats. Buffett says questions and answers will be different this year, with journalists alternating questions e-mailed by shareholders with those posed by shareholders in the audience.

9:33	Buffett notes that U.S. Treasury bonds recently have had negative yields. He said people might not see that phenomenon again in their lifetimes.

9:33	Journalist Carol Loomis says more than 5,000 questions were relayed to three journalists involved.

9:40

Journalist Carol Loomis said more than 5,000 questions were submitted via e-mail. The first question relates to derivatives and whether those financial deals are good for Berkshire. Buffett says over time, Berkshire expects to make money on the current deals. Buffett says the only money that crossed hands in the stock market deals so far has been $4.9 billion given to Berkshire in premiums. Buffett says the company can use that money for the next 15 to 20 years. And the stock markets on which the deals are made are expected to be higher than when the deals were struck.

9:47

tt

9:52	Buffett and Munger said the government's response to the financial crisis has not been perfect but it has been reacting the best it can. Munger said given the emegency the government should be judged with some leniency.

10:08

Journalist Andrew Ross Sorkin of the New York Times says about 300 shareholders had a similar question: Why does Berkshire keep a high investment in Moody's at a time that credit agencies are being criticized for conflict of interest and using flawed history based models? And why not use Berkshire's clout to change the behavior of the credit agencies. Buffett says the big mistake ratings agencies, Congress, bankers and buyers of homes made was thinking housing prices would continue to rise _ and then they collapsed. Buffett says ratings agencies continue to be a good business because there are not many of them and they deal with a large part of the capital markets. Buffett said Berkshire also does not buy stocks in companies to change their behavior. Buffett says in fact he has tried to influence behavior in the past, and never has been very successful.

10:17

Buffett is asked how the four investment managers chosen as possible successors to him did in 2008, a very difficult year. Buffett says there are three candidates as CEO, all are internal candidates. There are four possible investment successors, and one or more could be chosen. They are from inside and outside Berkshire. The four investment managers did no better than match the S&P 500. In 2008 they did not cover themselves with glory, Buffett says, but neither did he, so he is tolerant. Munger says any investment manager he knows who is regarded as intelligent and the rest, they all got creamed last year. Buffett says the investment managers over 10 years have done better. Buffett says he has not changed the list of four possible investment managers, either. Buffett says the CEO job is different, that person needs to step right in if something happens to Buffett. But Buffett says one or more investment managers do not have to actions right away. Buffett says an announcement should not be expected right away on investment managers if something happens to him. But within a month or so, an announcement might be made.

10:24

Becky Quick of CNBC says a question about three candidates for CEO successor: What are benefits of bringing in CEO early to give that person a chance to get used to the job? Buffett says he has heard that question before. Buffett says if there was a good way to inject someone into a role that would that person a better CEO for Berkshire, they would do that. But he says the three CEOs are running major businesses right now, and to sit in the office while Buffett is reading or on the telephone -- there is really nothing to do. He says "it would be a waste of talent." Buffett says the three candidates are 100 percent ready for the job right now. He says the biggest job they will have is developing relationships with potential buyers of businesss, with the world at large, with the shareholders. He says that will take time, though not a great deal of time. He says they know how to run businesses, and they probably would do some things better than he would. Munger says a lot of models that have worked well in the world, like Johnson and Johnson, work something like Berkshire and these talents pop up in the subsidiaries.

10:32

A shareholder asks Buffett to explain his investment strategies, like value investing, and how teach young people. Buffett says he brings in college students to talk with them each year. Buffett says he tells them it is important to know how to value a business and to know how to judge the markets. He says there would be nothing about modern portfolio theory or anything like that. He says it is important to know your circle of competence, start small and learn as you go along. Buffett says some accounting principles also are important. And then learn about market fluctuations and learn that the market is there to serve you. And that is not an issue of a high IQ, but rather an emotional stability and inner peace about the decisions you have made. Munger says there is the basic problem of always having half the future investors in the world in the bottom 50 percent. Munger says largely people should reduce the nonsense. Buffett and Munger agree that emotional makeup is more important than a high IQ. Buffett says he is asked by college students, "what are we being taught that is wrong?" Munger asks how Buffett can handle that question in just one session.

10:36

Buffett is asked how he would replace someone like Ajit Jain in the insurance division. Buffett says you don't, that Jain is unique. But authority does not go to the position -- it goes to the person.

10:46

A shareholder asks how Buffett views the markets' valuation of Berkshire shares. The market has it down 30 percent, while earnings were not down that far. Buffett says the shareholder put his finger on something there. Buffett says the investments are what they are in the stock market, so he does not have a problem with that side of the equation. Buffett says the earning power of businesses were down last year and will not do as well this year. But they are by and large good businesses. He says a few of them have problems, others will do very well. Buffett says Berkshire was cheaper in the stock market last year than its intrinsic value would indicate, but most companies were in the same boat. Buffett says over time, both stock price and intrinsic value will increase. And he hopes the operating companies over time will do better. Munger says last year was a bad year for a float business, making the owner of the float (insurance premiums held by Berkshire that can be invested) appear to be worth less than the owner will be worth over time. Munger says Berkshire's casualty insurance business is probably the best in the world. He says other companies in Berkshire's holdings also rank high in the world. Munger says if you think it is easy to get in the position that Berkshire occupies, you are living in a different world than the one that I occupy. Buffett says Berkshire's insurance business is remarkable, with remarkable managers. Buffett says with the economic meltdown, like the China Syndrome or something, it hurt jewerly and NetJets and other businesses, American Express, etc. But the meltdown also caused the phones to ring more at Geico. Buffett says all of a sudden saving money became very important. Buffett says that builds a lot of value over time. Buffett says Geico is now the third largest auto insurer in the country this year and the fundamentals are in place to take Geico much higher. Full Transcript

Bill Ackman: The Optimist

Bill Ackman’s friends describe him in two ways. They offer the euphemism that the prominent hedge fund manager “does not suffer from low self-esteem.” Then they observe that he is optimistic—almost clinically so. A pop psychologist might diagnose Ackman with hypomania, a condition notable for persistently elevated moods but without the self-destructiveness of true mania. “He doesn’t register reversals and defeats and hard feelings the way other people do,” says David Klafter, a former colleague.

I ask Ackman about the condition while he is driving in a car with his family. He hasn’t heard of it, but says he is an “extremely resilient person.”

His 11-year-old daughter playfully chides from the backseat, “And you’re modest.”

Ackman is an activist investor, a respectable term for people who in the 1980s were known as corporate raiders. He buys big stakes in companies and then offers his opinions—loudly—on how to improve their operations. Often, Ackman has been a contrarian. He bought shares of Rockefeller Center when Manhattan real estate was on its back in the mid-1990s, and he launched an attack in 2002 on MBIA Inc., the powerful and politically connected bond insurer, when everyone else on Wall Street was convinced the company was gold-plated. In early 2007, he sounded one of the most prescient warnings about the credit bubble and the leveraged complex of American finance.

William A. Ackman, who turns 43 this month, has had the seminal financial career of the past two decades, which is to say that he’s had the seminal American career of the era. Almost immediately after business school, he started a hedge fund to manage millions for wealthy people—with no investing track record. About a decade later, he was forced to shut down. He endured regulatory investigations played out in the klieg lights of the press. He relaunched and clawed his way back to respectability, becoming a member of a new generation of Wall Street wise men. No hedge fund manager or investment banker will be able to replicate his trajectory for at least a generation.

Now he’s gearing up for one of the biggest battles of his professional life. After losing nearly $2 billion in a calamitous bet on the retailer Target Corp.—almost all that investors had given him for the investment—he is waging a proxy fight against the company. He will have a tough sell in the leadup to the annual shareholder meeting in May. Taking on a company as big as Target is almost unheard of. Target decries the contest as “costly and disruptive.”

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Irrational Everything

Prof. Daniel Kahneman has dozens, perhaps hundreds, of stories about people's irrational behavior when it comes to making economic decisions. It's no wonder, because for dozens of years he and his late colleague Amos Tversky researched human behavior. Many of their studies concerned the making of financial decisions.

But the story Kahneman recalls when asked about the economic models at the root of the current financial crisis is actually taken from history, not an experiment. It concerns a group of Swiss soldiers who set out on a long navigation exercise in the Alps. The weather was severe and they got lost. After several days, with their desperation mounting, one of the men suddenly realized he had a map of the region.

They followed the map and managed to reach a town. When they returned to base and their commanding officer asked how they had made their way back, they replied, "We suddenly found a map." The officer looked at the map and said, "You found a map, all right, but it's not of the Alps, it's of the Pyrenees."

According to Kahneman, the moral of the story is that some of our economic models, perhaps those of the investment world, are worthless. But individual investors need security - maps of the Pyrenees - even if they are, in effect, worthless.

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Understanding Socialism

An economics professor at Texas Tech said he had never failed a single student before but had, once, failed an entire class. That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer. The professor then said okay, we will have an experiment in this class on socialism.

All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A. After the first test the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy.

But, as the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too; so they studied little. The second test average was a D! No one was happy. When the 3rd test rolled around the average was an F.

The scores never increased as bickering, blame, name calling all resulted in hard feelings and no one would study for the benefit of anyone else. All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great; but when government takes all the reward away; no one will try or want to succeed.

Warren Buffett on Wells Fargo

Fortune: How is Wells Fargo unique?

Warren Buffett: It's sort of hard to imagine a business that large being unique. You'd think they'd need to be like any other bank by the time they got to that size. Those guys have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it, and that's how banks get in trouble, when they say, "Everybody else is doing it, why shouldn't I?"

What about all the smart analysts who think no big bank can survive in its present form, including Wells Fargo?

Almost 20 years ago they were saying the same thing. In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things. But periodically banks do it, and they do it as a flock, like international loans in the 80s. You don't have to be a rocket scientist when your raw material cost is less than 1-1/2%. So I know that you can have a model that works fine and Wells has come closer to doing that right than any other big bank by some margin. They get their money cheaper than anybody else. We're the low-cost producer at Geico in auto insurance among big companies. And when you're the low-cost producer - whether it's copper, or in banking - it's huge.

Then on top of that, they're smart on the asset size. They stayed out of most of the big trouble areas. Now, even if you're getting 20% down payments on houses, if the other guy did enough dumb things, the house prices can fall to where you get hurt some. But they were not out there doing option ARMs and all these crazy things. They're going to have plenty of credit losses. But they will have, after a couple of quarters of getting Wachovia the way want it, $40 billion of pre-provision income.

And they do not have all kinds of time bombs around. Wells will lose some money. There's no question about that. And they'll lose more than the normal amount of money. Now, if they were getting their money at a percentage point higher, that would be $10 billion of difference there. But they've got the secret to both growth, low-cost deposits and a lot of ancillary income coming in from their customer base.

Insurance revenues for example, which had double-digit revenue growth in 2008.

And I would say that most of the critics of Wells don't even know they've got that business. That business alone is worth many billions of dollars. And their mortgage business, as you can imagine in this period, I mean, the volume that is poring through there, is huge. The critics have been right on other big banks, so I think they're inclined to sweep Wells in as well to some extent. And if you've been right on Citi and you've been right on BofA, it gets easy to say, well, they're all going to go.

We own stock in four banks: USB, Wells, M&T, and SunTrust. SunTrust I don't know about because South Florida is going to be the last to come back, and they've got a concentration down there. The other three, they're going to have a lousy year, but they'll come out of it with far more earnings power. The deposits are flowing in. The spreads are wide. It's a helluva good business.

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Dang Le: Notes from Buffett's Meeting Feb 2009

Note: Students from Emory and 5 other business schools were invited to come visit Mr. Buffett for a Q&A session. These notes were reproduced to the best of my ability as I heard and as I could recall them from a collection of mine and other students' notes. There is no guarantee that this was exactly what was said, but the intent was to preserve the spirit of the message. Enjoy.

Buffett:
Did you hear they called off the Wall Street Christmas Pageant this year? They had trouble finding three wise men…and a virgin. There are many opportunities right now. The markets are very inefficient at times, and this is one of those times.

Kansas:
Berkshire has invested in several insurance companies, would you go into the health insurance business?

Buffett:
No. Health insurance is so ingrained into national policy that it is a tough business. It’s pretty adversarial. I’m not really that excited about it from a business perspective. I don’t want to write policies with high loan loss ratios. That being said, I would buy the stock of an undervalued healthcare insurer.

Insurance is an interesting business. You know, we underwrote a two year life insurance policy on Mike Tyson. I wanted an exclusion against women shooting him, but they wouldn’t let me.

South Dakota:
You’ve recently invested in Goldman Sachs and GE. Is the financial sector a good buy right now?

Buffett:
No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.

Complete Notes

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TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box

Part 1 : http://www.cnbc.com/id/29595047

Part 2 : http://www.cnbc.com/id/29595412/

Part 3 : http://www.cnbc.com/id/29595537/

Part 4 : http://www.cnbc.com/id/29595993

Part 5 : http://www.cnbc.com/id/29596414

Part 6 : http://www.cnbc.com/id/29596605

Part 7 : http://www.cnbc.com/id/29596955