Burning Questions for Buffett
Readers ask about financials, recommended reading, and yes, the so-called Buffett rule.
Berkshire Hathaway (BRK.A) (BRK.B) shareholders will descend upon Omaha next weekend, kicking off with a cocktail reception at Borsheims jewelry store and ending with an event at Piccolo's Steakhouse. But the centerpiece of the weekend, and the main draw for the adoring throngs, is to hear from the Oracle of Omaha directly. Journalists, analysts, and a few shareholders will get a chance to lob questions at Warren Buffett and Berkshire vice chairman Charlie Munger.
In anticipation of the event, I asked Morningstar.com users what question they'd ask Buffett if they had the chance, posting a question in the Warren Buffett Investing forum of Morningstar.com's Discuss boards. Questions about the so-called Buffett rule, which would levy a minimum tax rate of 30% on those making more than $1 million, predominated, but investing matters also figured heavily into the thread. To read the complete discussion or share your own question for Buffett, click here.
'Will He Ever Consider Paying Dividends?'
The most pressing question on several readers' minds was why Berkshire doesn't pay a dividend.
Nittwit wrote, "I think Mr. Buffett is an amazing businessman; I wish I had his wisdom and insights. In the portfolio that I manage I do not hold any of his products. The reason they pay no dividends. Will he ever consider paying dividends?"
When Buffett finally hands the reins to his successor, Chief K wonders if that might not be an ideal time to start showing investors the money. He queried, "What do you think the chances are that your, and Munger's, successors at the helm of Berkshire will decide that starting to pay dividends will help 'buffer' the impact the change of leadership is certain to have?"
In a related vein, Papercroc is looking for dividends or a significant share buyback program. (Berkshire announced a share-repurchase program in late 2011 but hasn't been specific about how aggressive the buybacks would be.) "[Is] the board is considering to pay a growing annual dividend or repurchase outstanding shares in significant quantities? It would be nice to receive tangible returns on my Berkshire investment. I haven't sold any of my BRK.A/BRK.B shares since I bought them so all I have are unrealized gains."
Vandy73 had a related question: Given ultralow yields, what does Buffett do to generate at least some income from Berkshire's cash hoard? "Does he park it in low yield short term cash/bonds, purchase equities on a short term basis with plans to sell, buy options, an so on?"
Amid the clamor for dividends, Matt1812 defended Berkshire's no-dividend policy, writing, "The simple question you have to ask yourselves is whether you believe you as an individual have a better ability to allocate that possible dividend cash and invest it generating higher returns than Buffett? If you don't think you can better him, then let him carry on re-investing Berkshire earnings into new investments. If you do think you can do a better job of investing cash then you shouldn't be holding Berkshire shares in the first place."
He went on, "Further, other companies pay dividends (and carry out buybacks) when they hit a limit of how much they can re-invest internally (through expansion, capital purchases, acquisitions) to generate a sustainable return on equity; [that's] why dividend payout ratios are normally a fraction of earnings. In Buffett's case he is not limited by having to wait for an acquisition of a competitor or related industry player; he can invest in any sector/industry he wants. Hence, another reason why the paying of dividends is not appropriate for his company."
'Are They Not Wonderful Enough?'
In addition to discussing Berkshire's no-dividend policy, posters also had specific questions about the firm's holdings.
Bank of America (BAC) was top-of-mind for FidlStix, who's wondering about Buffett's change of heart on the bank. "Some years ago you shunned Bank of America by name in a shareholders letter, saying that you read the recent 10-K down to page 90, then stalled. I recall you said you reread that page and realized that B of A's financial entanglements were so deep and its explanations so obfuscated that you couldn't make sense of them. You declared you wouldn't invest in any company whose business model wasn't clear. Now you hold billions of dollars worth of B of A warrants and stock, as well as sizeable stakes in Bank of New York Mellon (BK) and Wells Fargo (WFC). Why the shift in strategy? Did you meet with Brian Moynihan (CEO of B of A) and get a clear explanation of what made no sense in that 10-K?"
Another controversial financials holding, Goldman Sachs Group (GS), was at the top of Liberty 11's list; this poster wondered about Buffett's stand on Goldman director James A. Johnson. (The firm of Ruane, Cunniff & Goldfarb, advisor to Sequoia (SEQUX) and longtime Buffett disciples, recently disclosed that it would be voting against the re-election of Johnson, owing to his role running Fannie Mae in the 1990s.) Liberty wrote, "Given the Ruane Cunniff/Sequoia Fund letter explaining its vote against James Johnson for director at Goldman Sachs, your and Munger's calls for exemplary behavior of leaders and business execs and punishment--legal and public shame--for those who abuse their positions, and your written record on the government-sponsored entities and their risks (you called it and sold Berkshire's Freddie Mac at a good time), will or has Berkshire also vote(d) against Johnson to be a director of Goldman Sachs?"
Rlmohla's questions center around what doesn't appear in the Berkshire Hathaway portfolio of businesses. "Payroll Processing firms like Automatic Data Processing (ADP) and Paychex (PAYX) are superb firms that are undervalued. So why does he not see a place [for them] in his portfolio? Are they not wonderful enough? Or does he not see them remaining superb for the long term?" Rlmohla also wonders what has kept Buffett out of Apple (AAPL), the world's most valuable company. "Why does he find it risky to invest in Apple? He recently mentioned he wished he invested in Apple. What are the qualities that he sees in Apple through his own eyes?"
'A Win-Win Combination for All?'
Given that Buffett is widely acknowledged as one of the world's most successful investors, other readers would love to pick his brain for overall strategy tips.
Speaking of Buffett's espoused preference for firms with moats, or sustainable competitive advantages, poster Rmohla queried, "What types of competitive strategies and competitive advantages does he likes the most? Also, [what are] some of the unique or not relatively well-known kinds of competitive advantages that he has come across?"
Parker, meanwhile, is curious about the role of customers in Buffett's evaluation of a business. This poster wrote, "In [the book] The Warren Buffett Way, a good valued business with future pricing power, a good management team, with clear shareholder interests selling at a discount might sum up 'the Way.' Not once did I read about customer satisfaction, or customer interests, or fair price for customers. For example, some of the early profits in the insurance business were rather excessive--almost theft in my view (probably not the politically correct word here).So my question based on the perspective set forth in The Warren Buffett Way: Why choose companies that value shareholder interests (possibly far) above customer interests and fair pricing, rather than a compromise for a win-win combination for all?"
Learning from what you've gotten wrong is key to growing as an investor, so DieterValue would ask, "What would you identify as being the main mistakes?"
Saveamerica would like to glean Buffett's insights into the Chinese economy, as Buffett has made investments in both PetroChina (PTR) (since sold) and, more recently, Chinese car and battery manufacturer BYD (BYDDY). "I am curious about his thought process on China. It is a massive economy, holding trillions of dollars. However, in terms of their business models, policies, and regulation, how it is different from western economies? What are his thoughts on current growth rate of economy, which to me appear to be partly state capitalism? If and when this massive economy falters, what is the risk for rest of the world ? Does he sees any resemblance between the Soviet Union and China?"
Meanwhile, Jakecalgary would like to know what's on Buffett's nightstand these days. "Last year during the shareholder meeting, either Buffett or Munger recommended reading the annual shareholder letter of M&T Bank (MTB) and J.P. Morgan Chase (JPM). Can you please recommend a few more reading materials for this year?"
'The Buffett Rule'
Other posters were more concerned with the Buffett rule, so called because Buffett has voiced support for increasing taxes on the wealthy.
Nittwit was polite in his line of questioning, writing, "I believe Buffett to be a good man, and I do not want to seem to negative with this next set of questions." He went on to ask, "What is his involvement with the so-called Buffett tax rule? Was it just a shot at the government in an effort to try and get its taxing policies under control? What is his plan for a fair tax code?"
Other posters were less delicate. Cousdon, in what has become a common refrain from opponents of higher taxes on the wealthy, challenged, "If you really believe the wealthy should pay more in taxes, what is stopping you from pulling out your checkbook and writing a check for a few billion, over and above what you should pay, to the government?"
In a similar vein, CARLL argues that Buffett could bump up his own taxes by paying himself a higher salary. "If Mr. Buffett is so concerned about paying a higher tax rate than his secretary, why has he not paid himself a $5 million or $10 million salary like a CEO in other major corporations do? It would be a great way to pay ordinary income taxes and might make him feel better about avoiding income taxes for all these years." (Buffett, like many wealthy individuals, earns most of his money from investment income, which is generally taxed at more favorable rates than ordinary income.)
Unintended consequences are on the mind of GRC1234, who queried whether the so-called Buffett rule might eventually ensnare folks who aren't superwealthy. "The alternative minimum tax was intended to make sure a few wealthy people would not avoid paying tax. Each year, Congress has to patch it so that it does not catch upper middle-income taxpayers. What measures should be taken to prevent this from happening with the Buffett tax rule?"
Vandy73, meanwhile, thinks the Buffett rule is on the right track. "Europeans have a limit on the amount of pay executives can make in relationship to their lowest paid employees, and I believe this would be a start in the right direction of the U.S. Why should the fat-cats of business get million-dollar bonuses when the masses are barely getting by?"
More broadly, Sthorson would like Buffett's opinion about what's going on in Washington these days. "As a political independent (partly driven there by the ineptitude of both parties) I'd like to know what it is that you like and dislike about each party."
Finally, Given that Buffett, 81, recently announced that he's being treated for prostate cancer, Wenzela isn't feeling very demanding. Rather, he thinks it's a good time for Buffett to savor all he's achieved. He wrote, "I wouldn't ask him anything. At this stage in his life I would simply wish him well. He's done great for his company and stockholders and should enjoy his success story."
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