A Weekend With Warren and Charlie

A friend of mine was invited to Omaha to part of the Berkshire Hathaway 50th anniversary celebration. To attend a Berkshire Hathaway stockholder meeting is to attend a celebration of free markets and capitalism, but the irony is that Warren Buffett, the Berkshire Hathaway CEO, is a leading Democratic donor whose money often ends up in the hands of politicians opposing those policies that have led to the growth of Berkshire Hathaway and much of America over the past five decades. Most stockholder meetings are held in sterile hotel rooms, last about fifteen minutes, and then boom, it is over. The CEO will say “what a great year we have, and please support the following agenda and people for our board..." and then the meeting is adjourned. Berkshire Hathaway is the complete opposite as 40,000 stockholders flood Omaha and spend the whole day rummaging through the various exhibits of companies that Berkshire either owns or invests in while listening to Warren Buffett and the vice Chairman, Charlie Munger, hold court while answering questions from the stockholders. For nearly six hours, the 84-year-old Buffet and 91-year-old Munger answer questions with no notes about the companies they own along with a sharp sense of humor that keeps the meeting going. It is one of the quickest six hours you will ever sit through.

In the beginning session, Buffet and Munger were confronted with questions about the practices of Clayton Homes which builds inexpensive manufactured homes and 3-G. Clayton has been accused of profiteering on the back of low income home owners. Buffett gives a classic lesson in economics as he essentially rips apart the news story. As he first points out, the newspaper talks of gross profits being 20% but fail to mention that pre-tax and after tax profits of Clayton are closer to 2% after expenses and taxes. He added that the number of failed loans was 3% with 97 percent of those who buy Clayton homes not foreclosing. Considering that vast majority who buy Clayton homes are in the lower income, this is not a bad ratio, and Buffett continues by noting Berkshire Hathaway, through their investment, is helping to spread the American dream of home ownership to lower income families. He defended the practice of promoting 20-year mortgages as opposed to the more traditional 30-year mortgages since it allows the homeowner to pay off their mortgages quicker.

In the case of 3-G, Buffett and Munger defended 3-G practices of cutting workforces of companies they took over as Buffet observed, “It is not the practice of Berkshire Hathaway to defend having more workers than what the company needs to survive.” He defended the practice of cutting jobs that are no longer needed in a company to give a company a chance to survive and grow. Elizabeth Warren, call your office for one of your top donors believes in capitalism and allowing companies to cut unneeded workforce.

On tax reform, Buffett acknowledges the need for tax reform, but he is on record for the “Buffett rule” that states the 1% must pay at least 30% of their income, and while he views positively the corporate tax reforms going through Congress, he made the case that American companies are not really over taxed. This actually produce the only disagreement with his partner, Charlie Munger, who reminded audience that in California, the high marginal tax rates including high capital gains tax are driving the wealthy and many entrepreneurs out of the state and quipped, “California simply doesn’t want to have wealthy people in their state.” (By the way, Munger admitted that he is a Republican, but you could tell by Buffet's look that he was hardly pleased by Munger’s story.)

While both men did not oppose minimum wage increases, they added that the downfall of increasing the minimum wage is it makes the lower income less employable, and both agreed that expanding the earned income tax credit was a better way to help the poor or lower incomes. This is more of a Republican ideal. Again, Elizabeth Warren call your office. One of your biggest donors is acting like a Republican.

The dark side of Green technology were expose as well since one of their investments, Mid-American Energy, uses wind to provide many Iowans with their energy need. Greg Abell, The CEO of Berkshire Hathaway Energy, which includes Iowa based Mid-American, is often mentioned as a possible successor to Buffet, and Buffet acknowledge that the only way Wind Energy is a worthy investment is due to government subsidies. Buffet views this as good policy (saving the environment and reducing our CO2 footprints and all that), but added that without these subsidies, renewables can’t make money. This is something to think about when the environmentalists’ extremists yell about the influence of fossil fuel companies, for they will overlook the billions of dollars being made by Buffet and others through Big Green. Much of this profit flowing to billionaires like Buffet are due to taxpayer subsidies, without which, they are not even making a penny. There is a phrase to describe this, crony capitalism.

A little Green crony capitalism notwithstanding, Buffett and Munger do believe in capitalism even if Buffet doesn’t always fund politicians who have the same belief that he does in our capitalist system. Buffet, through Berkshire Hathaway, has provided wealth to the middle class by helping to create a middle class investor class or providing resources to companies to stay in business and expand opportunities. Buffet believes the American dream is rooted in his Midwestern roots, and while one can question his investment in a political party in which an avowed socialist is running for the Democratic nomination for President, one can’t question his accomplishments as a business man.