Integrity is the safest way to make money, it’s terribly important

When I worked for the fastest growing bank in Africa, the CEO would often go on about how much he hated derivatives that were just beginning to emerge into the market place. He said if he could not understand it, he did not want it in his bank - it was making money like a casino not through good, rigourous banking. Michael Graham picks up this theme:

Berkshire is especially pumped about their $26 billion cash and stock purchase of the 78% of the Burlington, Northern Santa Fe Corporation (BNSF) they didn’t own. An extensively rebuilt and wisely regulated American railroad system is ushering in a whole new (green) era of national and international importance for the railroads. BNSF was described as their all-in wager on the economic future of America. It’s Berkshire’s biggest purchase ever.

Attendees and questioners from all over the U.S. also bore witness to the wealth their investments in Berkshire Hathaway has brought them. One elderly gentleman we met from Wichita Falls, Texas had come all the way to Omaha just to say thank you.

Munger’s comment that “Integrity is the safest way to make money, it’s terribly important” drew loud applause. So did his thoughts that there’s nothing wrong in “celebrating wealth when it’s fairly won and wisely used”.

There was laughter of a different kind when much of the blame for today’s turmoil was laid at the doorstep of Washington where “those who take the high road are seldom bothered by heavy traffic”.

Trust! Buffett has been criticized for his view that Goldman did nothing illegal in helping craft a between-professionals subprime mortgage deal which the seller wanted to decline, whereas the European institutional buyers of “Abacus” calculatingly took the opposite view. Munger agreed with Buffett, though musing about the ethics of such transactions. In his view derivatives play a useful role in genuine commodity and trade transactions, but when they are nothing but synthetic, casino-like bets (often also dreamed-up by academics) they should be “got rid of from the face of the earth” (loud applause).

 Trust, the plain-vanilla (“Dairy Queen”) way, couldn’t have come through more loudly or clearly. It’s a cornerstone of investing and of the Berkshire approach.

How much longer – the question of succession comes up with an increasing frequency at these annual gatherings? We were reassured that a short list of successors has been chosen, that the board knows who they are, and that the Berkshire and Buffett-Munger culture will live on.

At the same time the Qwest Center has been booked for 2011 and 2012!

By then there could also well be clearer answers to Buffet and Munger’s biggest worry; namely, how much longer Berkshire can keep building wealth for its shareholders at a rate superior to the growth in its benchmark S&P 500 index, as it has done for 38 of the past 45 years. We were told how a compound annual gain in its per share book value of 20.3% is going to be next to impossible to sustain. What should be done when Berkshire can no longer beat the S&P because of its sheer size? The question was posed rhetorically. A dividend perhaps? Knowing them, you can bet that whatever is done will be different?

There can be no question that these one-of-a-kind annual meetings and Berkshire itself will be different when its two great champions are gone. In the meanwhile, is Berkshire Hathaway a jumble of diverse parts, or an undervalued work of art like no other? I’m in the latter camp, also believing it deserving of a place in most, if not all, investment portfolios.