(April 30, 2016) Warren #Buffett and Charlie #Munger are widely regarded as the most successful investors of modern times, primarily because of their consistent record in outperforming the major market indices. Just take the performance of the #Berkshire Hathaway’s gain in net worth during 2016 was $27.5 billion, which increased the per-share book value of their stock by 10.7%.

Here are the keynotes Warren #Buffett and Charlie #Munger discussed at the 2016 #Berkshire Hathaway Annual Meeting:

Warren #Buffett concurred with a shareholder who pointed out that Berkshire Hathaway has invested in companies that require a lot of capital, are over-regulated, and earn a lower return on invested capital. #Berkshire Hathaway Energy and BNSF Railway are perfect examples of capital-intensive businesses in Berkshire’s portfolio. Warren Buffett said that the ideal business is the one that requires no capital reinvestment but is yet able to grow and return excess capital back to shareholders every year. See’s Candies and Buffalo Newspaper are two companies that require little capital and yet continue to produce ample amounts of cash. But Warren #Buffett pointed out that it is no longer easy to find companies like that – and especially one that is large enough to match #Berkshire Hathaway’s size.

Warren #Buffett and Charlie #Munger are paying more attention on selecting businesses that have superior management. In the old days, Warren #Buffett always chanted the mantra of buying a business that even an idiot could run because sooner or later, an idiot will. This, however, does not seem to apply for Precision Castparts, a recent acquisition that requires remarkable managers to run the organization. Charlie #Munger believes that as the world changes, it is necessary for #Berkshire Hathaway to revise their strategies. This also explains Berkshire Hathaway’s shift to more capital-intensive companies.

When Warren #Buffett and Charlie #Munger are asked about what they would do differently in life if Warren #Buffett and Charlie were to start afresh, Warren #Buffett said that he would never start a textile business while Charlie #Munger would wise up earlier in life. Charlie #Munger responded: “Not I’m 92, I still have a lot of ignorance left to work on.”

Warren #Buffett pointed out that reinsurance businesses are potentially going to face heavy competition in the next ten years. There are also limitations on what reinsurance companies can do with their float. As a result, #Berkshire Hathaway fully divested its holdings in Munich Re and Swiss Re last year.
Warren Buffett also pointed out that Amazon has significantly disrupted the traditional retail industry and will cause more disruption in the future. According to Warren #Buffett, the full implications are yet to be seen and many traditional retailers have not figured out a way to ride on the ecommerce trend or counter it. However, Warren #Buffett is not all too perturbed by ecommerce as #Berkshire Hathaway is not tied to any specific industry. Charlie #Munger also thinks that Berkshire Hathaway’s biggest retailers are so strong that they will be among the last to be hurt.

Warren #Buffett stated that #Berkshire Hathaway would never engage in derivatives that involve collateral. Warren #Buffett thinks derivatives are a potential time-bomb and remain a danger to the financial system. Charlie #Munger thinks it is best not to use them though #Berkshire Hathaway has profited from using derivatives in the past.

BNSF Railway is a business that Berkshire Hathaway bought at an attractive price and an investment that Warren #Buffett would consider holding forever. However, coal volume is expected to decrease and over a 20-year period, Warren #Buffett expects a 57% reduction in coal fire output that would gradually decrease earnings over the years from coal shipments.

Warren #Buffett pointed out that the float in any insurance company may be classified as a liability on its balance sheet but it is in fact a huge asset for #Berkshire Hathaway. Float is the amount of insurance premiums collected but not yet paid out in claims. As a result, the accountant treats them as a liability. However, Warren #Buffett uses the float to invest and generate investment returns and is therefore considered a huge asset.

Warren #Buffett believes that Berkshire Hathaway’s stock would be worth less if #Berkshire Hathaway is broken up by an activist investor.

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