Buffett & Munger Unscripted
A new book by Alex Morris distills key insights and wisdom from three decades of Berkshire Hathaway annual meetings.
“I have always preferred the system of retirement where you can’t quite tell, observing from the outside, whether the man is working or retired. A problem in many businesses, particularly the bureaucratic ones, is your employees retire, but they don’t tell you.”
— Charlie Munger, 1994 Berkshire Hathaway Annual Meeting
I started following Berkshire Hathaway in 1995 shortly after reading Roger Lowenstein’s biography of Warren Buffett, The Making of an American Capitalist. It is no exaggeration to say that reading Lowenstein’s book changed my life. I soon discovered Warren Buffett’s letters to Berkshire Hathaway shareholders and Benjamin Graham’s books. Without this intellectual framework, I surely would have been swept up in the dot com mania of the late 1990s and my limited capital would have vanished.
By the time I purchased my first shares of Berkshire Hathaway in early 2000, I thought that I understood the company and its leaders very well, but I really didn’t have a sense of Warren Buffett’s genius until I attended my first annual meeting in the spring of 2000. That meeting was also my introduction to Charlie Munger, who I knew very little about due to his low public profile at the time. Watching two elderly men answer questions for several hours, seemingly without tiring at all and cracking jokes throughout, was amazing in itself, but it was the substance of their discussion that was truly impressive.
For many decades, the only way to attend an annual meeting was in person. Starting in 2016, annual meetings were webcast live and a few years later, CNBC was authorized to maintain an archive of all annual meetings going back to 1994. This is a treasure trove of wonderful material since we have both video and a transcript for each meeting, but it would be a formidable task to view the hundreds of hours of video, take notes, and distill the material by topic in a useful way.
We are fortunate that Alex Morris decided to take on the task of viewing every meeting going back to 1994, distilling the material, and organizing it in a logical way that can be easily referred to. As he writes in the preface to Buffett & Munger Unscripted, his goal was to unlock this material for the benefit of investors and the business community. He chose to focus on business and investing topics exclusively, which omits many topics related to politics and life lessons.1
Many readers who have attended multiple annual meetings might be skeptical about reading such a book, but chances are that you’ve long forgotten much of what was said at the meetings. In addition, the organization of the book allows the reader to review comments on a particular topic over time. The ability to change one’s mind is critical as new evidence emerges.
For example, in the section covering GEICO and auto insurance, we can see Warren Buffett initially resist the idea of incorporating telematics into the underwriting process. However, over time it became apparent that Progressive’s pioneering use of technology was becoming a competitive advantage. Eventually, Warren Buffett and Ajit Jain acknowledged the need to invest more heavily in technology.
My favorite part of the book was the section covering corporate governance. Perhaps the comments on executive and director compensation resonated strongly because we are in the midst of proxy season. The common “best practices” of corporate America are totally opposed to the common sense wisdom of Warren Buffett and Charlie Munger, particularly when it comes to stock-based compensation. Their opposition to stock options has been well documented over the years, but the objection was not so much the use of options as the structure of the pay arrangements.
It might surprise some readers to learn that Warren Buffett views stock options for top executives as rational provided that the option’s strike price is adjusted for the cost of capital and retained earnings. In fact, Mr. Buffett has said that Berkshire’s future CEO could logically be paid with options:
“At Berkshire, for those that succeed me and Charlie, anybody that is in the very top position at Berkshire has got the job of allocating resources for the whole place. There could be a logically constructed option plan for that person, and it would make some sense because they are responsible for what takes place overall. But a logically constructed plan would have a cost of capital built into it for every year where we don’t pay dividends. Why should we get money from you for free? We could put it in a savings account and it would grow in value without us doing anything. And a fixed-price option over ten years would accrue dramatic value to whoever was running the place, if they had a large option, for putting the money in a savings account or in government bonds. So there has to be a cost of capital factor in to make options equitable, in my view … They should not be granted at below the intrinsic value of the company.”
— Warren Buffett, 2002 Annual Meeting (p. 140)
I attended the 2002 annual meeting but for some reason I had forgotten Mr. Buffett’s endorsement of the use of stock options, properly structured, for his successor. This is something we should keep in mind when Greg Abel takes over as CEO. Perhaps even more surprisingly, Mr. Buffett also said that it would have been perfectly appropriate for options to have been granted to him and to Charlie Munger:
“There’s nothing wrong with options per se; in terms of Berkshire, it would have been perfectly appropriate if a properly designed option had been given to me or to Charlie. We have responsibility for the whole enterprise, and we believe that any kind of incentive for performance should be related to the area in which you have responsibility.”
— Warren Buffett, 1997 Annual Meeting (p. 148)
So why did Warren Buffett and Charlie Munger never accept stock options? It is clear to me that their restraint was due to a desire to serve as exemplars. Mr. Munger had the following to say in response to Mr. Buffett’s lengthy comments on executive compensation at the 1997 annual meeting:
“We have some wretched excesses in American corporate compensation. I don’t think the excess is necessarily the guy who got the most money. In many cases, I agree with Warren, that the money has been deserved. But such is the envy effect that the practice spreads to everybody else. And then the taxi driver and everybody starts thinking the system is irrational, unfair, crazy. And I think that’s what causes some people, as they rise in American corporations, to, at a certain point of power gaining and wealth gaining, start exercising extreme restraint as a sort of moral duty.”
— Charlie Munger, 1997 Annual Meeting (p. 150)
In other words, it is worth leaving some money on the table when incremental wealth no longer has any possible utility and grasping for every last dollar might cause the overall system grave harm, which would be the case if the majority of the American people come to view capitalism as corrupt or rigged.
It is fascinating to come to the realization that Warren Buffett and Charlie Munger have always been fully aware that their extreme restraint regarding compensation was not necessary from a moral standpoint. It would indeed have been perfectly fair to compensate both men with properly structured options that reflected the tremendous value generated for Berkshire Hathaway shareholders. Instead, they both took symbolic $100,000 annual salaries for decades, leaving enormous wealth on the table.
What if Berkshire had granted options to Warren Buffett and Charlie Munger over the past half century? Obviously, the magnitude of the effect would depend on the specific terms of the grants, but Berkshire’s terrific performance combined with the effects of compounding would no doubt have made the value of those grants astronomical — certainly well into the tens of billions of dollars. What have Berkshire’s shareholders done to deserve this additional wealth, generated by effectively having Warren Buffett and Charlie Munger work for free all of these years? This is one reason for Berkshire’s “cult-like” following. Even those who have not attempted to figure the amount of this gift know that it is very substantial.
In my opinion, every Berkshire Hathaway shareholder would benefit from reading Buffett & Munger Unscripted, no matter how long they have owned shares or how many meetings they have attended. The passage of time tends to dim the memory and we can all use a refresher course from time to time. The book can be read straight through, as I did over the course of several days, or it can be used as a reference since there are sections organized by topic.2
Reading the book might also be an inspiration for readers to view some of the old annual meetings. I appreciated the fact that many of the meetings from the 1990s were heavily quoted. I did not attend meetings prior to 2000 and I now plan to watch the 1990s meetings in the near future.
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Individuals associated with The Rational Walk own shares of Berkshire Hathaway.
While some of the “life lesson” questions asked at annual meetings are repetitive, the answers were often insightful and useful for young people in particular. This would be out of place in a business book such as Buffett & Munger Unscripted, but perhaps represents an opportunity for another author to cover the “life lesson” material. It would certainly be more useful than typical “self-help” books.
Unfortunately, the printed book lacks an index which would make it even more useful as a reference. I suppose that it would be possible to purchase the Kindle edition and use the search function as an improvised index. Perhaps a future edition of the printed book will include an index.