Although Enron Corp.’s catastrophic collapse took a heavy financial and human toll, investing legend Warren Buffett told Berkshire Hathaway Inc. stockholders that the Houston company’s failure “will have a distinctly beneficial effect” on the nation’s financial system.
To the extent that its implosion should cause accounting firms, investors and corporate executives to reconsider the aggressive accounting stunts that have become widespread among U.S. companies, Buffet said, “Enron was a plus for the American economy.”
Buffett became one of the richest men on Earth by practicing a fundamentals-based “value investing” technique that is far from the freewheeling style that held sway at Enron. His conservative buy-and-hold strategy has proven so remarkably successful over four decades that many of the investors in his Berkshire holding company have become multimillionaires.
As a result, Berkshire’s annual meetings have over the past decade become celebrations of mutual prosperity, in sharp contrast to the dour formal gatherings most companies hold. This year, an estimated 14,000 stockholders trekked to this heartland city from across the U.S. to attend the annual meeting.
The meeting represents the 71-year-old Buffett’s principal public appearance of the year. As always, at Saturday’s meeting the genial-looking investor sat behind a bare table on the stage of a packed civic auditorium. At his side was his laconic investing partner and straight man, 77-year-old Vice Chairman Charlie Munger.
Sweet taste of success
Flanked by two giant video screens, the two men worked their way through a box of peanut brittle made by a candy manufacturer Berkshire owns, drank several cans of Cherry Coke–Berkshire owns 200 million Coca-Cola shares valued at more than $11 billion–and fielded questions from stockholders for several hours.
Stockholders step up to microphones that are scattered around the dimly lit Coliseum, and in the glare of a spotlight ask about Buffett’s take on various financial issues. A few years ago, Buffett’s refusal to invest in the high-tech sector spurred some pointed questions; since the sector crashed and vindicated Buffett, however, the questions are once again draped in florid praise.
“I would like to know if you and Mr. Munger are wearing Fruit of the Loom underwear,” asked one young questioner early in the session, noting that Berkshire recently bought the apparel company out of bankruptcy.
“I am,” said Buffett swiftly. “I don’t know about Charlie.”
The stone-faced Munger said, “I haven’t purchased any underwear for a long time, so I’m inappropriately attired.”
Buffett beamed: “He’s waiting for a discount.”
Questions ranged from why Buffett sold Berkshire’s holdings in McDonald’s and Disney in recent years, to why he has made a stock market bet on companies that have been hurt by asbestos lawsuits. Berkshire, which owns the Geico auto insurance company and has significant other insurance holdings, has been hurt by homeowner claims for damage caused by mold; Buffett, referring doubtfully to one $20 million mold-damage claim, told the crowd “I wish I had some of that mold.”
“You probably do,” grunted Munger, drawing a big laugh.
“I hope you’re referring to my house,” answered the multibillionaire.
Buffett fans repeatedly asked him whether he employs this or that obscure financial yardstick when picking a stock to buy, and he deferred as always, saying “there’s no single metric I could give you . . . that would tell you when it’s time to buy. It’s just not that easy.”
Not all fun and games
Beneath the good cheer of the long-running Warren and Charlie act was the crowd’s knowledge that Berkshire’s 2001 results were badly damaged when the holding company’s reinsurance operation had to pay out close to $2.5 billion in Sept. 11-related claims. The weekend’s events were as predictable, as hokey and as upbeat as they have been in other years. On Friday, Berkshire holders enjoyed cocktails with Buffett and shopped at a glitzy jewelry store Berkshire owns.
They had ice cream at a local Dairy Queen, a company Berkshire bought a few years back. They lined up for dinner at Buffett’s favorite steakhouse and ordered the same food their idol always has.
On Saturday, after the meeting, they gathered to watch Buffett throw out the first pitch at a home game for the Omaha Royals, a minor league team in which he has a minority stake.
Although idolized for his stock-picking skills, Buffett is a Wall Street outsider. He has long been an outspoken critic of the securities firms that he claims played a role in inflating the Internet investing bubble. He has criticized the huge stock-option plans that companies routinely give their top executives without recording the compensation as an expense.
Enemy of cozy corruption
He has railed at the overly cozy relationships between corporations and their auditors, at accounting practices that can mislead the public and at investment bankers who are only too willing to help a corporate customer sell a shaky deal to the public.
The Enron debacle reflected many of the negative trends Buffett has been warning against.
At Saturday’s meeting, there was little evidence the wispy-haired, bespectacled investor took pleasure in being proved right.
While he has called Enron “the symbol for shareholder abuse,” Buffett took pains Saturday to suggest that many other U.S. corporations have drifted into similarly risky, if less excessive, corner-cutting.
Enron, said Munger, “is certainly the most disgusting example of a business culture gone wrong.”
There will be more companies that get in trouble by engaging in Enron-style practices, he predicted, but with the example of Enron and its hapless auditor, Andersen, as a deterrent, “maybe in the future it will be restrained.”
Buffett isn’t unfamiliar with scandal. He was a big minority investor in the New York firm of Salomon Brothers Inc., and in the 1980s when the firm was faced with potentially ruinous regulatory treatment because some of its employees engaged in illegal bond trading, Salomon’s management stepped down and invited the Nebraskan to serve as temporary head. Buffett agreed to do so, and his reputation for integrity helped keep regulators at bay while Salomon cleaned house.
Drawing a parallel to Salomon’s brush with possible ruin, Buffett said he is sorry to see tens of thousands of Andersen employees who had nothing to do with Enron’s audit or the subsequent document destruction for which the partnership faces federal charges in danger of losing their jobs because of the actions of a few individuals.
Andersen was particularly vulnerable to liability claims that threaten to bring it down because of its structure as a professional partnership, Munger said.
“But maybe you should be extraordinarily careful, if you’re a partnership, in who you take on as a client, and what you agree to” as an auditor, he said.
