The Berkshire Hathaway annual meeting has become a big event, like a
financial Super Bowl. People fly in from all over the world to hear
Buffett and Munger field questions from the audience. There were
over 31,000 folks packed in the Qwest Center . "We like businesses
that drown in cash," Charlie Munger declared during the Berkshire
Hathaway shareholder meeting in Omaha, Nebraska last weekend. Warren
Buffet promptly agreed.

Throughout the meeting, Buffett and Munger repeatedly stressed the
importance of investing in companies that provide ample cash flow or
some other essential "margin of safety." These dreary investment
precepts might not sound like the kind of stuff that would provide a
weekend full of entertainment. But the Buffet-Munger show is like no
other. It is witty and quirky. And yet, it never fails to reiterate
the essential techniques that enabled these two billionaire-
investors to amass their incredible fortunes.

Buffett invoked Benjamin Graham's name several times throughout the
day, as people sought to discover Buffett's influences and mentors
over the years. The life-changing book for Buffett was Ben Graham's
The Intelligent Investor – in particular, Chapters 8 and 20. These
chapters deal with the crucial "margin of safety" concept and how
the investor ought to view market fluctuations. If you've never read
the book, get a copy and read those two chapters.

The idea of passion came up several times during the day. Buffett
advised people to "find their passion in life" and pursue that. (To
which Munger added that it would be helpful if you had an aptitude
for your particular passion.) Buffett said that when he meets the
managements of companies in which he might invest, he has to "see
the passion" and to see that they "love the business." He also added
that track records are an important factor. Drawing on a baseball
analogy, Buffett advised: "Look for the guys hitting .400 and put
them in the lineup."

To those just starting out in their careers, Buffett also
recommended working for someone you admire (and then joked that for
many people, that means working for themselves). He pointed to his
own experience working for Ben Graham and how much he learned during
that time. Finally, he said it is important to "have the right
spouse." He then quipped: "You may find the perfect woman, but you
may find she is looking for the perfect man, in which case, you have
a problem."

One of the recurring themes from the meeting was the utter
uselessness of mainstream financial theories taught in schools.
Buffett said there are really only two things you need to focus on
in school as far as investing goes: How to value a business and how
to think about market fluctuations.

Investors should not let short-term fluctuations derail their long-
term investment strategies, Buffett explained. Market prices are not
always the "right prices." That's why market fluctuations often
create investment opportunities for value investors like Buffett and
Munger.

There were many comments throughout the day about what kinds of
businesses Buffett and Munger like. The most memorable line here
goes to Munger, who said: "We like businesses that drown in cash."

Buffett added: "We like ideas you don't have to carry to three
decimal places." In other words, the best ideas do not require great
precision. "If someone walked in here and weighed 350 pounds," he
joked, "I might not know he weighed 350 pounds, but I would know he
was fat." Similarly, he's looking for obviously "fat" ideas.

He used PetroChina as an example of this idea. Buffett bought
PetroChina back in 2002, when it was a $35 billion company that he
thought was worth $100 billion. He bought the stock, having done
nothing more than read the annual report. With that big a gap, it
doesn't matter whether the company was worth $80 billion or $120
billion. There was a wide margin of safety.

Both men had lots of critical things to say about the so-called risk
managers of our day. Risk managers, as the name implies, are
supposed to ensure the safety and soundness of the investments made
by financial institutions. "But too often," Buffett complained, "a
risk manager is a guy who makes you feel good while you do dumb
things."

Someone asked whether the big investment banks are too complex for
even their managers to understand the risks the banks are exposed
to. Buffett said: "Probably yes." He also pointed out that the
managers have little incentive to worry about certain risks. His
example went like this: Say there is a 1-in-50 chance of a company
going out of business. If you are a 62-year-old executive planning
on retiring at 65, it's not in your best interest to worry about it.

By contrast, the 77-year old Buffett and 84-year old Munger DO worry
about risk. But they manage risk primarily by avoiding investments
they don't understand. "Risk comes from not knowing what you're
doing," Buffett once remarked. So because they avoid complex ideas,
they sometimes miss winning investments.

Buffett did not apologize for Berkshire Hathaway's conservative
investment principles. "We don't worry about the ones we miss," he
said. Getting an extra point or two in return is often not worth the
extra risk. "We do well enough and we sleep well at night," he said.

Moving to macroeconomic themes, Buffett said he doesn't see the
policies that lead to a weaker dollar changing anytime soon. So he
expects the dollar to remain weak against other currencies. He said
he is happy to own companies that earn their sales in currencies
other than dollars. Buffett is looking into Germany and has a trip
there coming up. Asked if he would buyout an Indian or Chinese
company, he said he would like to, but implied that the size of
those markets -- and legal restrictions on foreign ownership -- make
it difficult.

On the oil question, Buffett said spare capacity is as low as he can
ever remember. While he said the world would adjust, he
added, "Nothing we can do in any short period of time will wean the
world off oil." Munger added that he confidently predicts there will
be pain in making the transition to a world less dependent on carbon-
based energy sources. He also put in a good word for solar, saying
that, ultimately, solar will be an energy source we will learn to
rely on a great deal more.

As for ethanol, Munger said: "Turning American corn into motor fuel
is one of the dumbest ideas I've ever seen." He went on to say it
is "so monstrously dumb" that he thinks the idea is on its way out.

One shareholder asked how he should invest if he can't spend any
time on his investments because he has another job and his knowledge
of finance is limited. Buffett told him something I'm sure he didn't
want to hear: "Put your money in an index fund. Why should you
expect to make more than an index fund if you don't bring anything
to the table?"

Investing well requires time and commitment. That's why serious
individual investors need to commit serious time and effort to their
investment process if they hope to succeed consistently. But here's
a shortcut: Study the tactics of Buffett and Munger.

Buffett asked the employees in his office to calculate the
percentage of their income that they pay in income and payroll
taxes. Buffett, who said that he does his taxes without an
accountant and does not use tax shelters, revealed that he paid 17.7
percent of his income in taxes,while the average for his office
staff was 32.9%. None of Buffett's employees paid as low a rate as
he did.

Buffett then issued his CEO challenge: Buffett will donate a million
dollars to the favorite charity of any member of the Forbes 400 list
of wealthiest Americans who can successfully challenge Buffett's
claim that the average tax rate paid by the Forbes 400 billionaires
is lower than the average tax rate of their receptionists. THX for
the help ... Derek G.

So far, no one is biting. http://www.cnbc.com/id/21708265/