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By Greggory Warren, CFA and Jeremy Glaser | 04-25-2017 11:00 AM

How We Craft Questions for Buffett

Morningstar's Gregg Warren has honed his process of asking the right questions over the years he's been on the Berkshire annual meeting analyst panel.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Gregg Warren, he is our senior stock analyst who covers Berkshire Hathaway. He will be on a panel asking questions of Warren Buffett and Charlie Munger at this year's Berkshire Hathaway annual meeting. We're going to talk a little bit about his process of coming up with these questions and what's on his mind.

Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So, you get six questions. How do you narrow down the universe of everything you'd want to ask Warren Buffett into just the few that you'll have the opportunity to ask him?

Warren: Yeah. The interesting thing about that is, this will be our fourth year on the analyst panel. And in each year, we feel like we've honed in the process a little bit more, a little bit better each year. As you said, we only get six questions during the course of the meeting. So, we're already sort of competing against two other analysts, three journalists, and then the cadre of shareholders that are in attendance of the meeting.

So, we're trying to come at questions that not only add value for our research but that keep the shareholders engaged and that hopefully get Warren and Charlie talking a lot more about the businesses. And I think when Warren initially brought the analyst panel in, the intention there was to try and get more questions out there that would allow them to sort of focusing on talking about different parts of the business, expectations for the business and where they saw things going. And I think they've largely succeeded in doing that, although it's taken a few years for them to get there.

Now, as far as the questions that we ask, we're kind of limited overall in some respects because the insurance analyst--there's this one sell-side insurance analyst on the panel every year--and they pretty much have free rein over all the insurance-related questions. Buffett has already basically told us that we prefer that you leave those to that analyst. But we've got plenty of areas where we can ask questions, whether it's on the railroad, utilities, the manufacturing, service and retailing businesses. We can hit on corporate culture, succession planning, capital allocation, things like dividends, share repurchases overall. So, we've had plenty of fertile ground out there to work with historically.

But we're also sort of hesitant to put out what kind of questions we're potentially going to ask ahead of the meeting now that we are on the panel, mainly because it's disheartening when you have a really, really good question that gets taken away from you during the course of the meeting. We get plenty of questions taken away as we move in. So, we try to stay away from the obvious questions. For example, we expect that there will be a lot of questions about the airlines this year and the airlines stocks that Berkshire purchased. So, if we're going to put together questions on the airlines, we'll try and sort of nibble around the edges, look at things like moats, competitive advantages, sort of highlighting where his stance may have been in the past or highlighting things like the pricing differential between, say, the airlines and the railroads which is the sort of the natural comparison people are making here.

Glaser: If you take insurance out though, you mentioned a huge number of areas. How do you figure out what is going to get that kind of better response, that in-depth response and what's just going to get kind of a one-word answer or kind of gets pushed aside?

Warren: Yeah, that's always a challenge. We've learned it the hard way. I mean, I remember a few years back I asked a question to Warren and Charlie about why sit on so much excess cash waiting around for a big deal to come along, a $30 billion to $40 billion deal to come along. Wouldn't it be better to focus in on smaller deals that are likely to be of companies at higher sort of growth rates than maybe a $30 billion to $40 billion market cap company might have. Then Charlie shot me down right away about--I'm not going to buy a bunch of $100 million or $200 million companies. And I'm like, it's not what I meant; I was thinking $5 billion or $6 billion.

So, I learned right away that the way to ask a really good question, the way to elicit information from them during the course of the meeting is to be as explicit as possible and walk them down--I mean, our questions for these, my questions for Warren and Charlie are twice to three times as long as a question I might have for a normal CEO, because I'm sort of setting it up for the shareholders; I'm setting it up for them; I'm trying to sort of drive the question in a certain direction. Now, they may choose to go there or they may choose to ignore it. But that's always sort of the challenge.

Glaser: When you are considering their answers, how does that then kind of inform the way that you think about the company? Have you ever seen kind of an answer to the question really changed or radically changed your thinking about how Berkshire operates?

Warren: Yeah, there's been several instances where we've been able to walk away with some good nuggets of information. Just thinking about consolidation with the railroad industry or thinking about where they are spending capital on the renewable side of the business. I think we've been fortunate in that we've been able to sort of elicit some more detailed answers that have helped us as analysts to sort of think about how we approach the company or how we approach the firm. Or last year, I mean, we really sort of pushed hard on the share repurchases and sort of that 1.2 times book value threshold that Buffett has in place and we walked away with the impression that he focuses primarily on the Class A shares when he is looking to buy back stock. And it makes sense in the long run too, because if Berkshire is going to buy back stock, they will buy back and retire the ones that have sort of the highest voting rights, which are the Class As over the Class Bs.

Glaser: Gregg, thanks for sharing your thought process. We're looking forward to hearing those questions on May 6.

Warren: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

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