Purpose of Vorpal Trade: A Route to Independence

Although it has always strongly implied in the articles and topics covered in Vorpal Trade, an underlying motive for writing this blog is to share with others some of the knowledge and tricks that are useful for obtaining financial independence. Of course, it's hoped that it's useful for anyone with an interest in investment, psychology, or philosophy, but the theme that is in my head is that I want readers to get rich and be independent of the financial influence of others. 

There are several ideas that follow. First, I'm interested in giving you tools to become wealthy enough that work is optional. At the very least, this means helping you to retire comfortably. It could mean supplementing your income in later decades or retiring very early, or becoming independently wealthy. But even if none of these are immediately possible, I'd hope that some of this material allows you to attain enough saved capital that you have a sense of independence from your employer. Capitalism belongs to everyone, not just those who fit the stereotype.

Second, it is implied that these strategies are primarily for the benefit of independent investors. Meaning,  sometimes I will write about investment strategies that institutional investors can't use, are prohibited from, are disinclined to use, or are offended by. A classic example is index investing. I once wrote and delivered a presentation on how to beat professional investors at investing. It is quite possible to do it through indexing, and part of the mission of VT is to allow you to beat the average professional. This is not to say that some won't benefit from financial planning advice, which encompasses many more financial areas than I have covered or intend to cover here. If you have a need for advice on estate planning, insurance, inheritance, retirement cash flow, Social Security timing, or taxes, by all means please secure an expert. It may be a long time before any related wisdom might appear here.

Third is finding and warning about hazards in investment. Aside from the traditional scams, which I assume that most of us are aware of, there are internal psychological hazards to be avoided. These include problems of focus, awareness, distraction, emotional attachment, non-objectivity, and habit. The behavioral economists have figured out only some of these. Others are common sense, but since we are human, we may not be using all of the common sense we have, so reminders and exercises are useful from time to time.

Fourth, economics is fascinating and sneaky, and it intrudes on political affairs, so I'm interested in political economy because it affects the long term investing landscape. To be successful, we have to get out of our investments more than we put in, and society can put obstacles in the path of business that strongly affect whether it's worthwhile to make an investment in the first place. This is often where I'll wind up using the words "normative" and "objective", because what is a wonderful normative thought for someone else may make an investment objectively a bad idea.  

Finally, this blog is about the richness of the possibilities of investment and life in general. My bias is towards optimism, finding solutions, increasing wealth and living standards, and exponential growth. And perhaps not just in dollar terms, but in fulfillment, happiness, exploration of the world. We don't keep score with dollars because the score that matters; it doesn't. We measure dollars because that measurements objectively shows what works and what doesn't, and we delight in experimenting and learning about things that work. 10,000 years ago people lived day to day finding sources of food. We are doing the same, just with different tools.

These themes mean I rarely will write negative stories, philosophy for the sake of philosophy, or opinion pieces designed to forward an agenda. I may write against an agenda that is counterproductive for society, but usually even these will contain objective, neutral data or observations about the problems of the agenda being proposed. 

I may sometimes write articles or book reviews that seem somewhat removed. These will be several layers below the surface of investing, serving as foundations on which other ideas and mechanisms lie. Why? Exactly. Because I am still always asking "why?", and the asking often does not stop until I get to the deep layers. Once we have traveled through all the layers, though, we will have a profound sense of understanding and confidence that cannot be bought any other way.

Did Clans Cause the Kink in the Human Value Function?

Why should an investor investigate human studies fields like moral psychology, philosophy, and behavioral economics? Because people make investing decisions, people make consumption decisions, and the marketplace is not just influenced by but composed of decisions that people make. The nature of people is what drives the course of the market, profits, and long term prosperity. Then to be a good investor means being a good student of human nature and everything about human nature.

Of course, this absolves no one of the need to understand double entry accounting, charts of accounts, balance sheets, income statements, and the mathematics of compounding interest and finite series. You still make major mistakes if you get the human part right but fumble the numbers. The human mind is not very good at maintaining objective tallies over long periods of time or memorization of precise facts. Accounting math is still critical for obtaining and maintaining objective measurements of businesses and their results.

One meta-problem before us is how to weight our efforts in numeric evaluation against gains of human-centered knowledge. An implied assumption behind the number valuations of companies I've published since February is that the factual (objective, predicted long-term) value of a company may be different than how the market values it. We got the objective measurements from estimates of future earnings and the stability of the company's future revenues and growth. This is very numeric, but the basis for the numbers is often quite soft. To obtain such numbers, in 2021 we have to estimate how many widgets will be sold in 2031, and even in 2041. The accuracy of those numbers is highly questionable. The correct way to proceed is to refine your estimates of those numbers, and my proposal is that the best way to do that is to understand people. That leaves us with a potential division of labor something like 10% math, 90% psychology for our investment analysis efforts.

Prospect Theory: Interactions Between Loss Aversion and Clan Values

One way to check one the value of an investment theory approach that is heavily based in psychology is to look at the field of behavioral economics. In chapter 4 of Richard Thaler's book Misbehaving, on page 31 of the paperback version of the book, is a graph (figure 3) showing the utility of different amounts of gains and losses. It looks like this:

The curve is nonlinear for positive gains, with additional gains returning less amounts of utility. One hamburger right now is good and two is better, but at a certain point you are full and you don't want any more. 

Likewise, the curve shows diminishing negative utility for increasing losses. If I lose $1 at a poker game, I'm slightly poorer and my ego is bruised. If I lose $2 at poker, I'm even poorer, but my ego hasn't been bruised much more than it was before. 

The part that bothered Thaler and other behavioral economists is that this utility curve is not symmetrical. There is a kink in the curve at zero, with steeper losses of utility for small losses than there are for small gains. A loss of $1 hurts worse than a gain of $1 benefits. (Notice that the asymmetry of utility gains and losses is reflected in the availability of words in English. We have a word for small losses ("hurt") but there is no corresponding word for a small gain.) This phenomenon has been well-established through repeated experiments and reported in the economics literature. You can find many examples demonstrating it Thaler's book. It's not intuitive: Thaler himself says in Misbehaving:

Examine the value function in this figure at the origin, where both curves begin. Notice that the loss function is steeper than the gain function.: it decreases more quickly than the gain function goes up. Roughly speaking, losses hurt about twice as much as gains make you feel good. This feature of the value function left me flabbergasted.

What does this mean, and why does it exist? It's probably worth several articles or papers in themselves, but for now, I will say that it means that the human mind is trying to "ratchet up" its state in the world. Tentative gains are okay, but do not lose what you have. Perhaps this reflects a policy that is optimal for survival in a physical body. Loss of a limb or bodily functions that are permanent are very severe handicaps. It's not worth gaining a bunch of hamburgers if you suffer a deep wound.

There is a possible social explanation as well. In clan-based cultures, those in which scarce goods are often held in common by the community, gains are shared, but personal losses (cuts, bruises, exhaustion) cannot be. Hence, any losses are not shared, but gains are, and this internalization of the asymmetry of economic results experienced when living in a community are built into human psychology. When a hunter returns to the village, he alone bears all of the scars and injuries, but the meat is shared evenly with all. Some of us may no longer live in clan-based cultures, but most of the world still does, and nearly all humans did for at least the last 70,000 to 100,000 years, so those lessons are built into our genes. 

Anti-Normative Ramifications

That graph is important, and I suspect that it derivable from first principles for humans and most or all animals, and has ramifications for political economy, macroeconomics, and philosophy. Thaler says

That is a lot of wisdom in one image. Little did I know that I would be playing around with that graph for the rest of my career.

The graph may be even more important than that. Earlier in chapter 4 of Misbehaving Thaler says

Prospect theory sought to break from the traditional idea that a single theory of human behavior can be both normative and descriptive.

This little sentence is tucked away in a lengthier passage, but it shouts loudly, if you are looking for the message. Let's unpack it.

The phrase "traditional idea" indicates a common assumed idea, among academics. He is saying that it is a postulate of the business of studying human behavior; that few would question it. Hence, the sentence says that most academics are seeking theories that impose standards of human behavior based on scientific results. 

I'm not surprised, though such propositions are rarely stated explicitly. It could be that a lot of the motivation academics in human studies have is the desire to impose normative standards on others. People want to not only be correct for themselves in their own lives, they seek either to validate those ideas by affecting others, to gain by controlling others, or simply to control others for the pleasure of it. Academics have these same impulses, except that they seek moral superiority through knowledge and specialized analysis. 

But wait, does Thaler really mean to use the word normative in that sense? Earlier, he says 

By "right" I do not mean right in some moral sense; instead I mean logically consistent, as prescribed by the optimizing model at the heart of economic reasoning, sometimes called rational choice theory.

In case I was confused about the possible uses of the word normative, I looked it up. From a  DuckDuckGo search I got 

normative
adj. Of, relating to, or prescribing a norm or standard.
Establishing or setting up a norm, or standard which ought to be conformed to.

That seems pretty clear: it is the traditional use of the word, it is the way it is used in philosophy, and there are no additional nuanced meanings. The Merriam-Webster definition also does not admit for a meaning of "normative" as being "logically consistent." So, although Thaler is trying to use the word in one particular sense, I am suspicious that the proffered definition is a covering of tracks. After all, why re-define a word on the first page of a chapter to make it mean something else? Perhaps an editor flagged it, and Thaler expanded on his first draft, and in so doing attempted to sweep a distraction aside. 

Perhaps more likely is the idea that certain economists, such as behavioral economists, collectively misuse the word "normative" in a way that has come to mean something slightly different than the way the rest of us use it, but which still retains some of its original meaning, even if the community itself is unconscious of this retained meaning.

It seems likely that a community of behavioral economists would encounter this problem. Consider their task: They are seeking to understand how people make decisions in reality, which may not match what rational thinking says that they should do. Right away, we have a baseline problem: Is the rational thought process the baseline, or human behavior itself? What word do we apply? The word "normative" means "ought" normally, and so if people "ought" to be rational, then can we use the more academic word "normative" in its place?

The Verdict on Normative Human Studies

To return to the idea that inspired the previous section, it seems likely that most human studies academics are indeed seeking to construct a single theory of human behavior that is both normative and descriptive. Thaler calls this a "traditional idea", because academics assume that they have a license to pursue such a thing. Evidence: Several existing Nobel prize winning economists use their fame to push normative judgments through the mass media, judging and proclaiming standards for society. They are often even objectively wrong, but since newspaper articles are not peer-reviewed before publication, and opinion pieces are not intended to be fact-checked extensively, they continue.

Thaler's point was that behavioral economics succeeded in part because it breaks with this tradition, by seeking results that showed that humans behave in ways that are non-normative, in all senses of the word! Whether we use the normative definition of "normative", or Thaler's, we get to the result that people do not behave according to the rules of rationality. 

Which is something that any 14 year old teenager could have told you.

Apple Inc. (AAPL) Valuation

Apple needs no introduction. AAPL is widely owned by both go-go tech momentum investors and Berkshire Hathaway. What is it worth? Data is from Value Line, including growth rates. I've put together six scenarios:

scenario	base EPS	grow rate	grow dura.	growth rate from peak	dura. of post peak	disc rate	share value
2020 basis	$3.28	14.5%	12	-10%	8	5%	$111
2021e basis	$4.50	14.5%	12	-10%	8	5%	$152
market price	$4.50	14.5%	10	-7%	8	5%	$126
sharp obsol	$4.50	14.5%	8	-12%	8	5%	$89
nominal	$3.89	14.5%	8	5%	7	5%	$101
nomin, opt	$4.50	13.0%	14	-8%	8	5%	$171

Earnings are expected to rise sharply in '21 relative to '20, so I've included valuations from both bases for comparison. Since it is already May 2021, the nominal case blends the two. 

The challenge with valuing high tech is that trends do not last. When the nature of your business is disruption, you are subject to being disrupted by technology from other companies. That's why the sharp obsolescence case and nominal case use a growth trend of only eight years. I can hear people arguing about why the short durations are wrong. May I point out that 14 years is the same number of years since the introduction of the iPhone? If the argument is that the product is compelling to all of the people who already own it, that argues for stability, rather than growth. 

You can make other arguments that the iPhone user interface is an unusual sweet spot that will lead to loyal and extended adoption of Apple products for a long time. I've tried to reflect that in the numbers. In fact, the nominal case assumes that the post-peak period is a growth period, rather than the usual shrinkage. 

The story here is that AAPL's market price reflects a widespread understanding of its potential future discounted cash flow. There is no mismatch. Of course, it's so widely followed, why would there be a mismatch?

Coca Cola Consolidated Inc. (COKE) Valuation

Last time I promised to complete the beverage company survey, but once again the details proved to be significant enough to warrant a standalone article. Data is from company 2020 10K reports, Macrotrends, and company web sites.

Synopsis of Coca Cola Consolidated Inc. 

Largest Coca-Cola bottler in the United States, and bottles other brands as well. Distributes Monster, Fairlife milk, Dunkin' Donuts coffee. Has exclusive distribution rights for KO products in specific regions. Based in the Southeast, Midwest, and Mid-Atlantic portion of the United States. 13 manufacturing facilities, 14,000 FT and 1,800 PT employees. HQ in Charlotte, North Carolina. Has some religious elements in its Purpose; has a corporate chaplaincy program. Wal-Mart (19%) and Kroger (13%) together move about 32% of the COKE's sales volume. Shares some of the Coca-Cola legacy with KO. Capital-intensive, with substantial machinery and distribution investments. Has had average 1.7% net margin in the past. 

Main company web site. Investor Relations site has annual reports back to 2000.

COKE Valuation

Revenue and earnings data is from Macrotrends. Note that the EPS figure for 2020 matches that for fully diluted shares of 12M (Macrotrend) versus the current outstanding count of 9.373M (COKE 2020 10K). Dilution matters in valuing COKE, and recent gains likely means that all promised incentive shares will be issued. Amounts in the table are in millions.

	revenue	oper income	net income	oper margin	net margin	shrs	EPS
2020	$5,007	$313	$172	6.3%	3.4%	12	$14.73
2019	$4,827	$181	$11	3.7%	0.2%	12	$0.97
2018	$4,625	$58	-$20	1.3%	-0.4%	12	-$1.72
2017	$4,288	$102	$97	2.4%	2.3%	12	$10.30
2016	$3,130	$131	$50	4.2%	1.6%	12	$4.34
2015	$2,306	$98	$59	4.2%	2.6%	12	$5.12
2014	$1,746	$86	$31	4.9%	1.8%	11	$2.73
2013	$1,641	$74	$28	4.5%	1.7%	11	$2.42
2012	$1,614	$89	$27	5.5%	1.7%	11	$2.39
2011	$1,561	$88	$29	5.6%	1.9%	11	$2.52
2010	$1,515	$96	$36	6.3%	2.4%	11	$3.19
2009	$1,443	$95	$38	6.6%	2.6%	11	$3.37
2008	$1,464	$59	$9	4.0%	0.6%	12	$0.78
2007	$1,436	$82	$20	5.7%	1.4%	12	$1.71
2006	$1,431	$85	$23	5.9%	1.6%	12	$2.00
2005	$1,380	$92	$23	6.7%	1.7%	12	$1.99

Past revenue growth is not entirely organic, and has been supported by acquisitions. Valuation assumes a 2% net margin for base year EPS, which is above COKE average. COKE uses raw materials that are subject to inflationary pressures, and faces a monopoly supplier in its license agreements with KO.

scenario	base EPS	growth rate	grow dura.	growth rate from peak	dura. of post peak	disc rate	share value
pessimistic	$8.35	3%	14	-5%	12	5%	$144
optimistic	$8.35	12%	16	-3%	20	5%	$467
nominal	$8.35	6%	15	-4%	16	5%	$213
curr price	$21.53	3%	10	-5%	10	5%	$300
curr pr (dilu)	$14.73	5%	14	-5%	12	5%	$304
marg expan	$12.00	15%	7	-5%	16	5%	$295

The inclusion of "curr price" scenarios is an attempt to reconstruct what the market currently believes, using EPS estimates and manipulating the growth rates and duration to get the current market price as a result. '21 and '22 EPS analyst consensus estimates are $21.53 and $23.02. This seems optimistic, indicating that the market believes that recent elevated earnings are sustainable. Most of the other scenarios assume 2% net margins, which is closer to but above the historical average. 

Investment Discussion

COKE has already moved up from $150 to nearly $300 since 2019 on strong gross margins and earnings. It was as low as $75 in 2014, so COKE has already doubled in price twice in the past seven years. Nevertheless, historically COKE has had lower margins and it operates in a commodity business with thin margins that make earnings much more random than the beverage companies with greater proprietary elements, such as KO, PEP, and KDP. 

As so often happens when the market price and intrinsic value are close, and the valuation has a wide range, it's difficult to make a recommendation without deeper knowledge of product trends. For example, perhaps COKE is making most of its margins on specialty products like Monster and coffee. Even if carbonated Coco-Cola products continue to sell poorly, COKE's fortunes may be more determined by their non-KO brands.

Notes from the Berkshire Hathaway Annual Shareholder Meeting

These are my very informal notes about what was said at the Berkshire Hathaway May 1, 2021 annual meeting. I have definitely deviated from the actual words, because this is not a transcript, and in some cases I wrote what I thought was being said between the lines. A few additional thoughts appear mixed with the notes. I didn't record everything; there will be some gaps. You can watch the full video recording of the meeting at Yahoo Finance.  

 ~ ~ ~ ~ ~

Introduction to meeting and plan for events: people, 1Q results, WB comments, Q&A, formal annual meeting. Betty Quick had sifted through thousands of questions and will pose them to WB and CM.

Introduction of vice chairmen of BRK. Charlie Munger: met him 62 years ago, was building a house  in LA that he is still living in. Warren still living in the same house he bought at that time. CM is vice chairman of culture. 

Vice Chairman Greg Abel of everything at BRK except insurance. From Canada, plays hockey, graduated from college in Canada. Runs business employing over 275,000 people. 

Ajit Jain: Met him on a Saturday many years ago. "How much do you know about insurance?" "Nothing." "Well let's talk about it for a while." Was evident he was worth hiring. Critical to BRK's ability to quickly agree to take on insurance risks

For some period at some point in their lives, they all lived within a mile of my house in Omaha. We started in different places, came together, and now we're living in different places.

10Q on website, on Saturday morning. Recommend that you read it to understand BRK because it has a lot of information on the business. 1Q earnings, compared with 2020, and mark to market of publicly-traded stocks causing $55B GAAP loss last year. (Joke about being on vacation at that time...)

Abrupt shutdown of the economy last March.

Words to new entrants to the market, before they do 30 to 40 trades per day. Slide L1 showing the 220 largest companies in the world by stock market value. AAPL #1, 

U.S. at its founding had very few people compared to Ireland, Russia, Ukraine. Now the U.S. has five of the top six largest companies. The system has worked unbelievably well.

Invites the audience to make a guess: How many of those companies will be on the list 30 years from now?

Slide L2: Top 20 in 1989. None of the companies then on the top 20 are on the current list. 

It's a great argument for index funds. You just need to be on the ship. 

Situation in 1903, automobile revolution. Ford failed several times before finally succeeding. Suppose you had a prescient vision of the word in the future, of the superhighways and roads. Clearly there was a future for cars. 

Marmon company in 1911, had the first car that won the Indianapolis 500. Also innovated the rear view mirror. Slide of defunct auto companies whose name started with "ma", 40 companies. 2000 companies entered the auto business. Incredible future. In 2009 there were three left, of which two went bankrupt. There is more to picking stocks than deciding which industry has a future. There are few people able to pick the winners. It's not as easy as it sounds.

On to the questions. 

 ~ ~ ~ ~ ~

Why didn't BRK buy a bunch of shares at the bottom tic in March 2020? WB: I'm the chief risk officer. We want to do well, but we definitely want to not do terribly. We were sellers of maybe 1% of the businesses we owned then. We had a few subsidiaries who wanted to go in for help from the government. But WB said we can handle it, BRK can handle the risk. The COVID stimulus is for companies who couldn't handle the business disruption. 

For airlines, it clearly wasn't their fault. Total of the top four airlines amounted to $100B in market cap, one-twentieth the size of AAPL's $2T market cap. 

The economy has come back better than many had expected. I did not consider it a great moment in BRK's history. Exposure to business travel. Owns 19% of AXP, and owns Precision Castparts.

Q: You spent years with too much cash , loaded elephant gun. You didn't take advantage of the March 2020 dip. What did I miss? A: cash on hand is 15% of our business. We could have deployed $50 to $75 billion right before the Fed acted. When Jay Powell acted on March 23, there had been a run on money market funds. It was a repeat of 2008. Saying "Whatever it takes" made a big difference. 

In 2008 they said "can't give money to those dirty banks" but this time there was no one to blame. Now, 85% of this economy is running in super high gear. It was not a sure thing that the rebound would happen.

Blanche DuBois said "I depend on the kindness of strangers", but you can't count on that in business. Banks didn't anticipate that all businesses would draw down all of their credit lines all at once, which they did.

CM: It's crazy to expect that one would husband money and then come in on the absolute lowest tic. Because BRK can't, no one can. We sold some banks and airlines, that was the right decision.

Ben Nowell, after 15 year underperformance, what is the argument for long term shareholders? Munger feels that BRK is likely a better investment at the current time than the market (or indices). Our business are better than the average market. That's assuming we're all dead.

WB: I recommend the S&P 500 often. I never recommend Berkshire. Posthumous plan is for 90% to go into S&P index, 10% into Treasuries. The average person cannot pick stocks. We have shareholders who picked WB and CM. They see BRK as a lifetime investment. I like BRK, but the person who knows nothing about stocks at all, should buy the S&P 500.

WB's will will be a public record. Everyone can check afterward whether he was telling the truth. 

Andrew Dixon, UK: Moral question re Chevron purchase. Excellent question on global warming versus the business prospects for oil and gas production. Parallel case of externalities with tobacco. Overly expensive tax on hydrocarbons? WB A: People on the extremes of both sides are nuts. Chewing tobacco business experience. Ads for financial companies that would be a terrible outcome. Chevron benefits society in many ways as well. There are many aspects of business that you might not like, e.g. meat packers. If you expect perfection in companies or people, you will not find it and be disappointed.  Would not be uncomfortable owning the entire Chevron business. CM A: If a guy marries into your family, Swarthmore English professor or Chevron guy, which would you pick sight unseen? Charlie would pick the Chevron guy.

ESG-related Q. Why not be a force for good on the shareholder proposals? BRK has perhaps over a million shareholders. Three letters in the last year from shareholders. People who vote against the outside proposals are those who bought BRK with their own money. Those who vote for the outside proposals didn't. We do some asinine things because we are required by law to do them.

~360,000 employees in all kinds of diverse activities. Company is built on autonomy. 

Buffett is perhaps the only CEO who does not get a consolidated income statement on a monthly basis. He doesn't need it.

Lots of property, plant, and equipment. More than most companies. Can't close coal plants until you can replace the generation. You have to have the transmission in place.

Munger: The people who ask questions about global warming etc. think they know the answer. Munger and Buffett don't know the answer, and avoid the hubris of trying to think that they do.

Abel: BNSF and BHE have significant carbon footprints. We've been doing environmental disclosures to investors since 2007, especially the fixed income investors. In 2007 we highlighted climate change as a fundamental risk, and had recommendations for our industry. We made a variety of pledges, including investing $15 billion in renewables. We focused on quantifiable outcomes. Paris Agreement targeted 26% to 28% carbon reduction between 2005 and 2025. BHE met that goal in 2020. Also will meet the 2030 target by 2030. BRK is taking care of the transmission side of the business, which is why they are able to meet these targets. 

BHE has been closing coal-fired electricity generation units, and has a plan to close all of them by 2050. 

BHE and BNSF are the vast majority of the BRK carbon emission footprint. BNSF has also been tackling carbon emission reduction. 

Abel's view: BRK is doing an excellent job reducing carbon emissions. 

Buffett: transmission is the core of the problem. The electricity must move from the generation point to the usage point. 

We would rather talk to people who entrusted with their investment money, not those without money at stake asking for briefings on climate.

Q: On long tail insurance risk. A: When the words in the contract are tortured, usually the insurance company loses. Regulators play a big role in the economics of the P/C insurance business.

Boy Scouts of America claims: now up to 100,000, going back to 1950s. Statute of limitations had expired, but in some states the government unilaterally extended the statute of limitations, increasing the amount of long tail risk for insurers.

Difference of opinions on Costco and GEICO. Munger: I like Costco. There is no conflict. We have no argument there.

Interactions of BRK managers (Abel and Jain). Jain: Me and Greg won't be a replica of the Charlie and Warren pair. Respect; we call each other for expertise in the other's business area; that happens. Abel: Charlie and Warren have an exceptional relationship. We both have a strong feeling for the BRK culture. We want to maintain and build on the BRK culture.

Why do BNSF and GEICO operate at lower profit margins than Union Pacific and Progressive. Will margins improve? WB: look at the current quarter earnings. 

WB: In a few years Charlie will be aging at only 1% a year, but companies run by 25-year olds will be aging at 4% a year.

Both Progressive and GEICO were started in the 1930s. We've had the better product in terms of cost. We have 13% of the market, PGR slightly less. 25% of the market together. PGR has done a very good job lately. We've made some improvements lately. We gave back $2.8B to policyholders when COVID broke out.

Jain: PGR is a machine. They are very good at what they do. PGR had growth rates and margins twice that of GEICO. GEICO is catching up on rate to risk. GEICO missed the bus on telematics. 

WB: GEICO and PGR will be the leaders in auto in the future.

Jain: GEICO has better branding and cost management.

BRK owns 5.3% of AAPL. Tim Cook is one of the best managers in the world. They have a product that people absolutely love. The product is incredible, a huge bargain, it plays a huge part of people's lives. It is indispensable. Compare to a $35,000 car. Which would you give up first if you had to? Sold some AAPL last year, that was probably a mistake. Charlie thought it was a mistake.

CM: would not like to see the tech giants in the top 20 brought down by anti-competitive actions. Their size is an advantage for the U.S. 

Valuation environment: WB cited a WSJ snippet from the corner of last week's paper: 0% 4-week Treasury notes. If you reduce gravity, even WB can be in the Olympics. Lower interests rates fuel higher valuations for equities. Yellen commented on the low cost of funding the national debt.

Samuelson in the 1970s said that you could conceive of 0% interest rates, but it can't really happen. But here we are: 0% rates. On short term notes, BRK was earning $1.5B annually pre-COVID, now it's $20M. 

[Editor: What if future expectations are for deflation, that is lower costs for a basket of good? Different valuation environment entirely.]

CARES and COVID checks: people feel good about the stimulus checks. If it works and continues, you might see more of that. There are consequences; if we make no money on cash, the pressure is on us to do something different. People become numb to numbers; trillions means nothing to people. 

CM: Professional economists have been very surprised by what's happening. It turns out the world is more complicated than they thought.

Q: what is your thought about MMT?  CM: I think the MMT economists are more confident than they should be. New things may work for a while, but if you keep doing it, problems will happen.

WB: With the lower interest rates, the value of float is greatly reduced. St. Petersburg Paradox. A consequence of some abstract mathematics. You lose gravity entirely. 

We don't know what the consequences are of 0% rates. But there will be consequences. 

SPACs. If you have a deadline to buy a company, your decision will be worse. It's an exaggerated version of a speculative market. Keynes quote about speculators and bubbles from The General Theory of Employment, Interest and Money. Bubbles are no problem if on a steady enterprise. But if the bubble is the enterprise, then it is gambling and will not be well done. Lots of interest in gambling around the world. 

When the other guys are gambling is done with other people's money, BRK cannot compete. WB: it is about as bad now as we've ever seen it. CM: it is a moral failing. When you push SPACs etc. to the extreme, it reflects badly on the civilization. It is shameful.

WB: Gambling is a human instinct. CM: I don't mind the gamblers. I mind those who exploit the suckers.

Better to wait for better prices for stocks? CM: We're used to shooting fish in a barrel, but that's gotten harder. WB: We have more cash than usual. We greatly prefer not to lose money, that is the way we've always operated.

You bought some stocks you said you don't know a lot about. What are they? WB: Prefer not to name them! We don't have special insights. I'd rather own those stocks than receive the interest rates on T-bills. CM: Bernie Sanders has basically won. With everything so high, and rates so low, the Millennials will have a hell of a time getting rich like we did.

Share buybacks are a form of market manipulation? WB: It's just distributing cash to those who would prefer it. Some people may want out of the business, others want to stay in. The arguments against share buybacks make no sense at all. It makes sense for those who sell, it makes sense for those who don't. CM: The people criticizing buybacks are bonkers.

taxes: What are your thoughts on capital gains proposals, and stepped up basis? WB: I don't put my political opinions in a blind trust, but I also don't speak politically for BRK. I've never asked a single employee who they voted for. CM: It is probably a mistake to be anti-capitalist, it raises GDP for everybody. Benjamin Franklin said that an empty sack has trouble standing upright. I'm leery of those who are constantly mad at people because they have more money.

What are your thoughts on those fleeing high tax states? CM: I wouldn't move across the street to save taxes. Why would you drive out the rich people? It's contrary to the interests of the state.

Tax rates: The Federal Government has a special class of stock, AA. They get a share of the earnings, but have no equity interest. Scenario: what is the DCF of the future taxation flow? I would love to see the Government create a taxation receipt company, and sell shares. Then the market would value the shares appropriately in response to tax rates.

Q re taxation of WB estate. WB: If the Government takes it all it wouldn't bother me. CM: I guarantee it won't bother you. (!!) WB: Would prefer that the estate be used privately.

What has COVID taught us about systemic and correlated risk? AJ: endemic risk is underpriced in the industry. The big lesson is to recalibrate the term time. 

WB: Gates gave a TED talk 10 years ago. This pandemic is not the worst case. Nuclear risk is too big. The insurance industry can't handle the financial risk of a massive nuclear strike. Insurers will be much more careful in the future when addressing epidemic risks. Europe is coming down much harder on insurers than U.S.

Martin Devine: What is your best estimate of BRK's exposure to COVID risk? AJ: put up $1.6B in reserves. Does not take into account fewer accidents. Writing checks for $1.6B, but will likely grow. Industry has reserved $30B to $35B. $100B overall damages to industry. The risk is manageable. WB: We will not be in the top 5. We write less life insurance, less annuities. Our goal is to put up the liability when we think it has happened. [So the impact is already reflected in Q earnings.]

What does KSU and Canadian Pacific (or CN) combination mean in terms of competition for BNSF? Their goal is to create a Canada-Mexico north-south railway. STB will look at effect on competition. (WB hemming on effect of cost of capital on deal.) This combination would not happen in a different (higher) interest rate environment. Railroad deals take a long time to evaluate.

We looked at buying CP. Everybody looks at everything. We would not pay this price. It's kind of play money with interest rates this low. It's somebody else's money. Investment bankers are cheering you on.

Made a mistake in Precision Castparts in 2016. Earnings declined in 2020 because of COVID. What would you have done differently? WB: BRK didn't make the mistake, I did. We evaluate deals, and we didn't make a mistake on management. Business flow from customers is probabilistic. We paid too much relative to the subsequent cash flow, but. Airlines don't need as many parts. Decreased air travel will cause that. WB: I will make mistakes. GA: the rest of us will help (make mistakes). GEICO is doing 15x as much business as they did when we bought them.

It's not like having children. Some businesses you buy grow to 10x plus. Others plod, but the goal is to have some of them grow 10x, 20x, 30x. #1 risk factor is that you get the wrong management. The  big danger is that you get a very pleasant and personable buy incompetent chief manager.

Q: Now that cryptos are worth >$2T, what's your take? A: knew there would be one of these Qs. Tough question. NE governor quote on tough questions: "I'm all right on that one." CM: I hate crypto. I don't like shoveling out extortion, or paying billions to those inventing new financial systems. 

Q re Elon Musk: TX generating proposals. Battery vs generation. GA: Event in TX in Feb. $80B to $130B in incurred losses. Infrastructure didn't perform. We spent some time to put together a proposal for TX. The fundamental purpose is to propose our best, and if something comes along that is better, so be it, we contributed to the process. The big difference between the Musk and BRK proposals is 4 hrs vs 7 days of supply. Could be delivered Nov 2023. We're also willing to put $4B up as a penalty clause for failing to deliver. We won't have any rinky dink clauses that allow an escape for us if we don't come through.

The nature of the utility business is that you have to be prepared for things that are rare. You need a margin of safety.

Writing policy on colonization of Mars? AJ: No thank you, I'll pass. WB: Depends on the premium! Different rates for Elon involved or not. AJ: Very concerned with writing any policy where Elon is on th other side.

Tech investments: traditionally shy, now taking on larger investments, like AAPL and Snowflake. WB: They are less capital intensive. We like that. See's Candy is a classic example from 1972. Doesn't require much capital, and great businesses. The business prices reflect that. Capitalism is about people getting a return on capital.

Energy is not a high return business. You can't get Google-like returns on the utility business.

Todd and Ted not available at the shareholder meetings. Health care venture is now shuttered. WB: I don't want people quizzing our great experts on stocks at the shareholders meetings! 

Q: China outlook. CM: Chinese govt will allow businesses to prosper. It is remarkable that Communists saw the success happening elsewhere, and decided to make the shift to Adam Smith. Me and WB are not as successful at changing our minds like that. It is a tremendous success at increasing the average standard of living of the Chinese citizen.

WB: It is amazing at what has been accomplished. We'll see what happens.

Tim Medley in Jackson MS: Larry Summers was critical of $1.9T stimulus plan. Worried about inflation. Least responsible economic policy. WB: Larry's been reading his uncle's book. Those ideas have been enunciated even more since March 19th. We don't know, but Larry's view is an important view. We do know that with debt at high levels of GDP doesn't make a lot of sense. At BRK, we don't think we can make money by predicting macroeconomic outcomes. CM: It's not clear whether Summers is right or wrong, but he is one of the few saying these things. Reason CM admires him (because Summers won't get a role in the Biden admin)

Banks: WB: didn't like the proportion we had prior to COVID, too much risk in certain pandemic outcomes. We trimmed our position.

Matt in LA. Verizon stake, what is your theory? Bent pipes. WB: He's analyzed it well. 

Possible legislation blocking large companies from acquisitions:  We don't discuss specific proposals like that. But these things could change all the time, but we (BOD) don't spend time on mushy proposals where we don't know the specific results of the policy. CM: Nothing to add.

Don Graham: Why does quick insurance decision matter less now? WB: 9/11 scenarios for airline, building insurance, call on the phone. That environment hasn't persisted. They needed big limits. They knew that BRK could back the risk. AJ: The supply side has expanded a lot more. More syndicates.

Scotland: Kraft Heinz performance, pre- post COVID. WB: Don't know that we can speculate. Greg is on the board. We did what we said we'd do. We're the financial partner, they are the operating group. GA: They've put a strong manager in place to execute and rationalize their capital structure. WB: We feel better. Problems are caused by the myths people have about their own organization. The CEO often works with investor relations, constant contact with the analysts. Part of the catechism. After a while, no one is going to contradict the previous stories that were told.

There is a lot of mythology that gets handed down from one CEO to the next. It gets repeated, and leads to enormous errors. CM: Sir Cedric ___ I've been such a great actor for so long that I no longer know what I actually think. Happens with politicians as well. Young people get these ideas...

Bill Begley: What happened to the health joint venture? Disbanded, all heard. WB: 17% of GDP. We accomplished a lesser object, we knew less about our own operations than they did. That is one case where centralization might save some money. We probably saved more money than our partners (AMZN, JPM) who knew their expenses better. 

People (health care, insurance) have a vested interest in doing things the way they do. Tax withholding  strategy. People don't see the money that is being spent on their behalf for healthcare, the company pays it. Company taxes are reduced by spending on healthcare insurance, but if you pay for your own, you don't get that deduction. The most prestigious people are on the hospital boards. No other country pays more than 11% of GDP, we pay 17%. We lay out more money and get a poorer result. 

CM: You were shooting at a huge elephant. 

WB: We found a tapeworm in the American economy, and the tapeworm won.

Mark Blakely: insurance focus, BRK owns many subsidiaries never mentioned. Could BRK or is it too large to manage? WB: One (RV?) business in Ft Worth bought 15 years, run by a great manager, recently deceased. WB has never been there to visit. CM: I don't think we're too big to manage. We are very decentralized. We can do that for a long time. Out decentralization has given us more benefits than deficits. But you have to have the right culture. Which we do. Greg will keep that culture. Roman empire worked for a long time because it was decentralized.

What do you read, and how do you make investment decisions? AJ: I read the proposals people send us. I do not read the ARs. GA: What I focus on are materials around our businesses, risks and how things could be disrupted. Spend a lot of time sharing info back and forth with managers. WB: both these guys can absorb a ton of info. They know everything and they enjoy it. You have to be in love with your business. We have to have the culture that allows that love to flourish.

Robinhood: WB: Looking forward to the S-1 from them. It's become a very significant aspect of the casino aspect of the stock market in the last 18 months. They have attracted 12% to 13% of casino participants, lots of 7 day and 14 calls. Nothing immoral or illegal, but can't build a society around people doing that. Taking advantage of people's propensity to gamble is not admirable. I hope we don't have more of them.

CM: That is really waving the red flag at the bull. We don't want to make our money selling things that are bad for people. It's getting respectable for people to do these things, and they are taxing hope. We've got the states doing it too, they replaced the Mafia in the numbers game. It doesn't make me proud of my government.

Chris Reed of Phil: Are you seeing signs of inflation. WB: we are seeing very substantial inflation, we're raising prices, our suppliers are raising prices to us. We really do a lot of housing. Steel costs go up every day. There hasn't yet been any slackening. The market is red hot. It just won't stop. People keep buying. The supply chains are all screwed up. Money is being diverted from parts of the economy into the rest of it. I haven't worn a suit in a year. The dry cleaners have gone out of business. Restaurants are killed, unless you have takeout. It is not a price sensitive economy right now in the least.

CM: There is one intelligent man who thinks it is dangerous.

GA: Steel, lumber, oil, raw materials. There is a scarcity of product right now. It is a real scarcity. Some of that has contributed. Feb TX had some impact on oil supplies.

Quant funds: it seems to work. Will you hire? WB: no. CM: Short term worked, so they kept doing it. On long term predictions, they didn't do so well. If they traded too much on short term, they hurt their own returns. We don't know how to do it.

Buy and hold, vs turnover. WB: there isn't much turnover. CM: its still too much!

2013 prediction: WB: COVID improves the pension position, fewer pensioners. States may go to Wasd DC. The managers listen to the salesmen who have these deals to get them better returns. People can move to better states, corporation plants cannot. Adverse selection.

What's the biggest lesson you've learned the last year? WB: listen to Charlie. CM: If you are confused, them you don't understand it. WB: we enjoy the movie (COVID), with all of the strange events, entertained by the unusual events. We go to work everyday trying to not disappoint the people who trusted their money to us.

[end of Q&A]

 ~ ~ ~ ~ ~

Official shareholder meeting begins.

Share counts and votes cast of each share class. Reading of minutes. (dispensed with) Election of directors, moved, seconded, voting results presented. Shareholder proposals presented and voted on.