Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. We're here at the 2010 Berkshire Hathaway Annual Meeting, talking with John Fox and Tom Putnam of FAM Funds about their impressions of the meeting, and what they think of the discussion today. Gentlemen, thanks for joining me.
Thomas Putnam: Thank you for having us.
Glaser: So, Tom, you were saying that you've been coming to the meeting for quite a few years now.
Putnam: I've been coming since 1986, as a matter of fact, so that's make this, what, about my 25th year coming here [laughs] .
Glaser: So, of the 25, where would you rank this meeting today?
Putnam: Well, they've all been good. I think this was a good meeting because of the content, especially with the Goldman question being asked first, and him kind of clarifying exactly what the transaction is. Which I think better clarifies the position that's out there, from a standpoint of the brokerage business and how the brokerage business really operates.
I think Charlie Munger said it best yesterday. You know, there's no question, probably, they didn't do anything illegal. Whether they really skirted the edges though, and it's a transaction that they should have entered into, is another question.
Glaser: There was a lot of talk today about reputation just being so important, came up a number of times. Are you at all concerned that if Goldman, more of these charges come out, that their reputation could be harmed and some of that could fall off onto Buffett, as he was so firmly in Goldman's camp today?
Putnam: I kind of agree with Warren. If it's an allegation that's not proven, or they're not convicted, then I don't think Goldman suffers. Obviously, if they're convicted, they do suffer a lot, yeah.
Glaser: There could be a lot there. He talked a little bit about the state of the economy, and that things are getting a little bit better. Have you seen that in your company's results, or in the companies that you own results, that you've seen things getting...?
John Fox: We actually absolutely have. I enjoyed sitting down and hearing, his first comments, talking about what he's seeing through the window of looking at his companies. And, Jeremy, we definitely see that, whether it's the economic data, the government data, or in the earnings reports, and the conference calls. We've been seeing it getting better for quite a few months, and really just inching forward, really every month.
Glaser: Warren Buffett is not known as a man without a lack of opinions, but one thing he didn't have a strong opinion about today was the state of the valuation in the stock market. He said it was preferable to bonds or cash. Where do you guys kind of see stock valuation at the moment?Read Full Transcript
Putnam: Well, I think he did intimate a little bit, that with the move up, that the market is a little more fairly valued than it was last year. I think we would agree with that, and we would agree with that with some of our companies. But, on the other hand, we're also seeing, and when's the last time we've actually seen actual earnings come in at above analysts' estimates? And they're coming in consistently above analysts' estimates.
Maybe this has a little more to go. Probably it does, because companies have gotten a lot thinner, as far as their balance sheets are concerned, and a lot more profitable, as far as marginability is concerned. This may have a little more to run.
Glaser: Are there any sectors that you think are looking a little more frothy than others, ones that seem to have a little bit more value?
Fox: On the value side, we like financials. And we'll talk about insurance, since we're at the Berkshire Hathaway meeting. But the property and casualty insurance business is selling at a 10 to 15 year low at price to book ratios. Now, the ROEs are low right now, because of low interest rates and where we are in the insurance cycle, but both of those things will change. When they do, you'll have book value growth and multiple expansions.
We also like banks. We think the credit cycle is peaking and that banks will be earning more a few years from now than they're earning today. So those are two areas that look attractive.
Glaser: One of the things that was surprising, that wasn't talked about that much, was the BNSF acquisition. Obviously, he's been a shareholder for years. This was the single largest deal he did. Were you at all surprised that there wasn't more discussion? And then also, what did you think of the deal for Berkshire shareholders?
Putnam: Well, there was some discussion on BNSF, and I think it's exactly how Warren characterized it. Sometimes we don't take Warren at his word. We think there's some mystery behind it. But, it was a large acquisition where they were able to put capital to work. And it's going to give them a good return, but it's not going to give them the kind of returns that they've had in the past with smaller companies.
Fox: And I would just add, I agree, I was surprised there was not more discussion. I think Warren said it all in the annual report, when he said we're putting this in the utility segment. Because that's how they look at it, as a utility type return on capital.
Glaser: A little bit of talk about kind of the regulated returns that you can get on a railroad. He seems to be definitely be viewing it as a place that he can put that capital to work. Gentlemen, thanks so much for taking the time to talk with me this afternoon.
Putnam: Thank you, Jeremy, appreciate it.
Fox: Yeah, thanks for having us.