* Buffett Takes a Swing at Controversial Drug Maker
One question deals with a difficult topic for Mr. Buffett: It addresses the Sequoia Fund, a mutual fund founded four decades ago to take on investors in what was then Mr. Buffett’s investment partnership, which was being wound down.
Since its inception, the Sequoia Fund has outperformed various stock market indexes. But it was severely wounded last year as shares in one of its biggest holdings, the drug maker Valeant Pharmaceuticals, plunged amid concerns about its business practices. Its high drug prices, its appetite for ever-bigger acquisitions and its ties to a dubious pharmacy affiliate all drew criticism.
Shares in Valeant have tumbled 67 percent so far this year, and its former chief executive was called to testify before Congress this week about the company’s drug-pricing policies.
Such was the turmoil at the mutual fund that two of its five independent directors abruptly resigned, apparently over its huge stake in Valeant, which at its peak represented 32 percent of the fund’s portfolio.
Turning quiet, Mr. Buffett spoke highly of Sequoia’s history. The mutual fund was founded by a close friend, the late William Ruane, and was the only one he recommended to his clients when he closed down his investment partnership.
But he also noted that the money manager responsible for Sequoia’s investment in Valeant, then-chief executive Robert Goldfarb, has left the fund. Such a concentrated bet was a huge mistake.
Mr. Buffett then openly derided Valeant, something that he had previously left to others. Mr. Munger famously and negatively compared the drug maker to the former conglomerate ITT last fall, drawing complaints from Valeant’s most outspoken backer, the hedge fund executive William A. Ackman.
In his remarks on Saturday, Mr. Buffett called Valeant “enormously flawed” and said that Berkshire had previously been asked to take a look at the company. It declined.
The billionaire went further, implying that the company was similar in some respects to “chain letter” companies designed to fool investors.
But leave it to Mr. Munger to toss off the most prickly description of the company: “Valeant was a sewer, and those who created it deserved the opprobrium they got.”
* Why Berkshire Is Safe From Activist Investors
Activist investors, hedge funds who buy stakes in companies and then demand changes to strategy, have gained enormous power in recent years, giving moguls like William A. Ackman, Carl C. Icahn and Paul E. Singer outsized stature on Wall Street.
Yet Mr. Buffett doesn’t worry about one of those investors ever coming in and trying to break up the company he has built. Could such a hedge fund come in if Berkshire’s stock ever trades at a significant discount to where it is now?
In responding to a question on the topic, the billionaire concedes that he once fretted over the issue. “I used to worry about that more than I do now,” he admits.
Why less concern these days? Mr. Buffett turns to a familiar defense of how Berkshire’s sprawling conglomerate model — one that, employed by other companies, has made them targets of activism campaigns — underpins the strength of its myriad businesses. Berkshire Hathaway Energy, he argues, would not be able to pivot away from coal and toward renewable energy sources if it didn’t have the backing of its corporate parent.
Moreover, Mr. Buffett notes that he still has an enormous stake in the company that would dissuade such an activist. Even after he dies, and his holdings are eventually doled out to charity, his estate will remain Berkshire’s biggest shareholder for some time while that stock is distributed out.
When prompted, Mr. Munger adds drolly, “I think we have almost no worries at all on this subject. Other people have a fairly justifiable worry.”
A curious Mr. Buffett prods his lieutenant to explain. Activists, according to Mr. Munger, could prompt companies under attack to seek an ally. And what more powerful partner could those targets seek than Berkshire?
“I’m Warren Buffett, and I approve this message,” Mr. Buffett declares.
* Fun in the Exhibit Hall
Earlier in the day, Mr. Buffett participated in a newspaper tossing challenge prior to taking the stage at the shareholders conference.
* Defending Coca-Cola
Mr. Buffett has long been held up as a moral investor of sorts, refusing to invest in industries like tobacco because of their unhealthiness. So why, DealBook’s Andrew Ross Sorkin asks on behalf of several shareholders, should Berkshire investors be proud of Berkshire’s investment in Coke?
The roughly 10 percent stake has proved to be a lightning rod in recent years. The hedge fund mogul William A. Ackman, among others, has attacked Coke as a provider of sugar water that has helped spur a rise in obesity and diabetes.
Despite an admonition for Mr. Buffett to avoid referencing his own Coke consumption, a favored dodge when asked this question in the past, the billionaire jokes once again that he is probably one-quarter Coke.
What follows is probably the fullest answer he has given yet on owning a nearly 10 percent stake in the soft-drink giant. And it essentially amounts to this: People can choose what to eat and drink. Consuming unhealthy amounts of calories is a personal decision, and the 85-year-old Mr. Buffett says he’s content eating large amounts of fudge and peanut brittle — a box of the latter is displayed prominently on stage — and Cherry Coke.
To further illustrate his point, Mr. Buffett speaks of an imaginary twin brother who ate broccoli and other nutritionally superior foods. That sibling might live longer, he says, but probably would be unhappy.
“You have a choice in consuming more than you use,” Mr. Buffett says of calorie consumption. Referencing his own diet, he adds, “I’m a very, very happy guy.”
* The Problem With Reinsurance
Berkshire may be known as a holding company for innumerable consumer brands and industrial businesses, but much of the financial firepower of the conglomerate comes from its insurance businesses. Yet one of the first questions asked at the meeting was about Mr. Buffett’s pessimism over his company’s financial powerhouse.
Berkshire sold down its stakes in two big reinsurers, Munich Re and Swiss Re, in part because the business looks challenged. Low interest rates have lowered the returns that firms reap by reinvesting the insurance premiums they have collected and not yet paid out, known as “float.” Mr. Buffett adds that Berkshire faces fewer constraints, because its money comes from its operating businesses as well as its insurance float.
Mr. Munger adds that the reinsurance business has gotten much more crowded, primarily from hedge funds. Mr. Buffett says that while supply in reinsurance providers has gone up, demand for insurance has not.
* Down to Business
Mr. Buffett and Mr. Munger have finally taken the stage, and after a couple of jokes — about Mr. Munger’s advanced age and luck with the ladies and about crying from Mr. Buffett’s 7-month-old great-grandson — the two get serious.
Among the most striking things of the Berkshire meeting this year: It’s being translated into Mandarin. Interest in the event from Chinese investors has been high over the years, and increasingly bigger numbers have been coming to the event.
Mr. Buffett begins with a rundown of Berkshire’s first-quarter results. Insurance profits are down from the same time a year ago, as losses from weather catastrophes have hit the business hard. Railroad profits, from Burlington Northern, are down as well.
The Berkshire chief notes that the company’s goal has been to increase its after-tax operating earnings, which exclude investments and other financial engineering, every year. The company has largely succeeded, except after 2001 and 2008. Here’s how the company has done.
* The Show Before the Show
Shareholders attending the Berkshire Hathaway annual meeting often get to the CenturyLink Center arena well before doors open to grab prime seats. They also want to sit through a bunch of commercials.
This year’s pre-show footage ran ads for Berkshire companies like Duracell and Coca-Cola and this adorable ad for Heinz. The Berkshire Hathaway Energy ad touted its efforts to produce cleaner energy.
The pre-show also recapped previous celebrity skits, including those featuring Susan Lucci, Jamie Lee Curtis, the cast of “Desperate Housewives” and the stars of “Breaking Bad.”
And there is always the sobering replay of Mr. Buffett’s testimony before Congress about the scandals besetting Salomon Brothers, which the billionaire then chaired. It features the now-famous line, “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
Newer elements included an animated take on “Trading Places,” the classic finance-minded comedy, starring Mr. Buffett, Mr. Munger, the reinsurance chief Ajit Jain in the Dan Aykroyd role and the Geico gecko in the Eddie Murphy role. Instead of fixing the orange juice futures market, however, the Berkshire duo conspire to fix the market for cocoa beans to affect See’s Candy (another Berkshire company).
The highlight, of course, is the annual celebrity skit. This year’s edition features Arnold Schwarzenegger, the new host of “Celebrity Apprentice,” who’s trying to fill the final spot on the show. Rejected candidates include: Kenneth I. Chenault of American Express (“Credit card chief, denied.”), Virginia M. Rometty of IBM (Mr. Schwarzenegger says he types on an iPad) and Muhtar Kent of Coca-Cola. The first three lead companies in which Berkshire has invested, of course. He also rejected Danny DeVito (“Twin”).
Mr. Buffett calls, begging for a spot. His bona fides include appearing in “Wall Street: Money Never Sleeps,” to which Mr. Schwarzenegger responds, “Sequels are for girly men.”
Nearly despondent, Mr. Schwarzenegger takes a call from “The Terminator” — who happens to be Mr. Munger. The host celebrates, calling the nonagenarian “someone with balls.”
The camera then cuts to Mr. Buffett, sitting in his office, amusing himself by playing with Snapchat filters. Admittedly, he’s better at it than this reporter.
The audience was highly amused.