2002 Annual Meeting Summary and Key Discussions

The 2002 meeting was characterized by Buffett and Munger's increasingly sharp critiques of corporate accounting practices and the "tort system" in the United States. They also provided significant historical context for long-standing Berkshire features like the Class B shares.

Key Themes

EBITDA and "Bullshit Earnings"

Buffett delivers a blistering critique of EBITDA. He argues that any manager who suggests capital expenditures (Depreciation) aren't real expenses is either delusional or dishonest.

The Quote: "I think you can almost say that about any management that uses EBITDA. They're telling you 'bullshit' earnings."
Rational Analysis: Interest and Taxes are real cash outlays. Depreciation reflects the eventual need to replace equipment. Ignoring them is a recipe for disaster.

The "Piano in a Whorehouse" (Stock Options)

Buffett mocks the logic used by some in Silicon Valley and Venture Capital (specifically mentioning John Doerr) who argued against expensing options.

Double Counting Myth: Critics argued that expensing options and showing dilution was double counting. Buffett countered that if an employee is paid in cash and the company issues stock to cover it, it's two separate economic events.
The Analogy: He compared the flawed logic of options proponents to a piano player in a whorehouse claiming he didn't know what was going on upstairs.

The Tort System and Asbestos

Buffett describes the U.S. tort system as a "wild card" for insurance companies.

Asbestos: He notes that asbestos liabilities are the most difficult to estimate because the "rules" of the system change after the insurance policies are written. Corporations with "deep pockets" are targeted regardless of their specific liability.
See General Re

Class B Shares (BRK.B)

Buffett explains the 1996 issuance of Class B shares was a defensive move to stop a "jerk promoter" who intended to create a unit trust that would sell expensive, tiny fractions of Berkshire shares to uninformed investors.

Design: The B shares were designed to have 1/30th the economic interest but only 1/200th of the vote, specifically to keep the majority of the capitalization in the A stock while providing a low-price entry point for individual investors.
See Class B Shares

Dexter Shoe: A Formal Mistake

Buffett uses the 2002 meeting to formally dissect the failure of Dexter Shoe.

Structural Disadvantage: He admits the error was thinking Dexter had a sustainable moat. In reality, the 10x difference in labor costs between the U.S. and offshore manufacturing proved insurmountable, even for a well-run brand.
The Price of Error: He laments that he used Berkshire stock (worth billions later) to buy a business that eventually went to zero.

Notable Interactions

ABC News / Kirby Vakuum

Buffett defends Kirby after a sensationalist ABC News report. He reveals that ABC ignored Berkshire's unique 1-year full-refund policy for elderly customers to create a "hit piece." He cites this as an example of "extraordinary [bad] journalism."

Circle of Competence

When asked how to know the boundary of one's Circle of Competence, Buffett gives a definitive answer: "If you have a doubt about whether it's in your circle, it isn't." Competence includes being realistic about what you don't know.

Quotes

"If you have a dozen very bright MBAs... and we spent some time with them, I think we'd have a reasonable chance of picking someone in the upper quartile. But I can't write you out a software program that will enable you to do that."
"You don't need a high IQ in this business. What you need is temperament... you have to be able to think for yourself and not be swayed by the crowd."
"We don't want people discounting our candy [See's]... Price is part of the integrity of the product."

🎤 2002 Annual Meeting: Accounting Fancy vs. Economic Reality

"Every time you see the word EBITDA, you should substitute the words 'bullshit earnings.'" — Charlie Munger

🎭 The Narrative Context

The 2002 Meeting was conducted in an atmosphere of deep skepticism following the collapse of Enron and WorldCom. Buffett and Munger spent hours dismantling the "Accounting Fancy" that led to those scandals. This meeting is best remembered for its brutal honesty—both in its attack on the EBITDA metric and in Buffett’s own painful recursive analysis of the Dexter Shoe failure. It is a masterclass in separating "reported numbers" from "economic reality."

💡 Integrated Philosophical Gems

The Philosophy: "EBITDA is Evil"

Buffett and Munger deliver a blistering critique of EBITDA as a valuation metric.

The Logic: Any manager who suggests that Depreciation (the "D" in EBITDA) is not a real expense is either "delusional or dishonest."
The Insight: Interest and Taxes are real cash outlays. Depreciation is the eventual cash outlay for equipment that must be replaced. Ignoring these is a recipe for catastrophic valuation errors.
The Quote: "I think you can almost say that about any management that uses EBITDA. They're telling you 'bullshit' earnings."

The Insight: The "Piano in a Whorehouse" (Stock Options)

The Duo forcefully argues that stock options are a real corporate expense that must be deducted from earnings.

The Analogy: Buffett mocks those who claim options aren't an expense because they don't involve cash. He compares the logic of these managers to a piano player in a whorehouse who claims he didn't know what was going on upstairs.
The Moral: "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if an expense shouldn't go into the calculation of earnings, where in the world should it go?"

The Confession: The Final Post-Mortem of Dexter Shoe

Buffett uses the 2002 meeting to formally dissect his greatest mistake: Dexter Shoe.

The Error: Buffett admitted he was wrong to think Dexter had a sustainable moat. The low-cost labor advantage of offshore manufacturing proved insurmountable.
The Price: He characterizes the error as a "Lollapalooza" because he used Berkshire stock (which appreciated massively) to buy a business that went to zero. "I essentially gave away a huge portion of Berkshire for nothing."

The Strategy: Knowing the Boundary of Competence

When asked how to determine the edge of one's Circle of Competence, Buffett provides a definitive, operational rule.

The Rule: "If you have a doubt about whether it's in your circle, it isn't."
The Insight: True competence is binary. If you have to ask if you understand a business well enough to value it, you have already answered the question in the negative.

🏢 Tactical Discussions

Class B Shares (BRK.B): Buffett reiterates that B shares were created in 1996 as a "defensive move" to stop predatory promoters from creating unregulated unit trusts for Berkshire stock.
Kirby Vacuum: Buffett defends the business against sensationalist reporting from ABC News, citing it as an example of "extraordinary [bad] journalism" that ignored facts to create a "hit piece."

🗣️ Verbatim Masterclass

"You don't need a high IQ in this business. What you need is temperament... you have to be able to think for yourself and not be swayed by the crowd."
"We would rather be roughly right than precisely wrong."
"Pride of authorship has no place in a capital allocation decision."

🔗 Evolutionary Links

Entities: Warren Buffett, Charlie Munger, Dexter Shoe, General Re
Concepts: EBITDA, Stock Option Critique, Circle of Competence, Economic Goodwill, Class B Shares

[!CAUTION] Treat EBITDA as a red flag. If a management team emphasizes EBITDA over net income, they are likely trying to hide a massive capital requirement or a structural weakness in the business.