2004 Annual Meeting Summary

The 2004 annual meeting, held May 1 at the Civic Auditorium in Omaha, drew approximately 19,500 shareholders — a near-record. The session is remembered for two centerpieces: Buffett's frank acknowledgment of a $10B mistake of omission (Walmart), and his deepest engagement to date with the mechanics of corporate governance failure — not the rules, but the sociology. The meeting also features a Phil Fisher tribute (Fisher had died the previous month), a discussion of the "St. Petersburg Paradox" in valuation, and sharp commentary on the Google IPO owner's manual. Derivatives, compensation consultants, hedge fund fees, and the audit committee framework (first proposed in the 2002 letter) are all revisited with new specificity. The meeting confirms the full recovery of the insurance portfolio and quantifies the cumulative return on the foreign currency position.

Historical Context

Date: May 1, 2004
Venue: Civic Auditorium, Omaha, Nebraska
Attendance: ~19,500 shareholders (near-record)
BRK.A Price (approx.): ~$88,000–$92,000/share
Notable Personnel: Deloitte & Touche partners present for the first time to respond to the four audit committee questions live from the stage
Recent Events: Clayton Homes fully integrated; McLane running; GenRe profitable; Phil Fisher death (March 11, 2004); Google announced IPO with an "Owner's Manual" letter modeled on Berkshire's

Meeting Highlights

Walmart Mistake: Buffett's most extensive public confession of an error of omission — "thumb-sucking" cost approximately $10B
Derivatives as Time Bombs: Extended critique of the Freddie Mac accounting collapse as a derivatives-driven failure; predicted "big problems" within 10 years
Audit Committee Live: First time Deloitte & Touche responded to Buffett's four questions publicly at the meeting — a corporate governance innovation
Phil Fisher Tribute: The synthesis of Graham (quantitative value) and Fisher (qualitative excellence) as the origin of Berkshire's modern investment philosophy
Google Owner's Manual: Buffett praises the IPO document as the best corporate communication since Berkshire's own Owner's Manual
Inflation Defense: Detailed discussion of which business types survive inflation — GEICO-type pricing power vs. capital-intensive businesses that must reinvest just to maintain volume
Hedge Fund Critique: Most extensive to date — fee structures, incentive misalignment, overcrowding in arbitrage strategies
Compensation Consultants: "I would rather throw a viper down my shirtfront than hire a compensation consultant." — Charlie Munger

Key Q&A Exchanges

On Walmart: Q on the biggest investment mistake → Buffett: "I sucked my thumb when I should have been buying. It cost us about $10 billion." Munger: "Thumb-sucking is a very expensive activity."
On Derivatives: Q on derivatives risk → Buffett: "I will predict that sometime in the next ten years, you will have some very big problems that will either be caused by or accentuated in a big way by people's activities in derivatives."
On the Audit Committee: Q on the four questions → Deloitte partners present their answers on screen; first public incorporation of the audit committee framework
On Gold: Q on whether gold is an inflation hedge → Buffett: "We prefer assets that generate cash flows in any currency — See's Candy, GEICO. They work whether you pay in dollars, seashells, or anything else."
On Independence: Q on Buffett staying on Coke's board despite "conflicts" → Buffett: "Running down a checklist does not constitute thought. Berkshire has $10 billion in Coca-Cola. You want someone in that boardroom thinking about the shareholders."

🎤 2004 Annual Meeting: The Sociology of Corporate Failure

"I will rather throw a viper down my shirtfront than hire a compensation consultant." — Charlie Munger, 2004

🎭 The Narrative Context

The 2004 meeting is the governance meeting — the year that the institutional critique of American boardrooms reaches its most specific and prosecutorial form. The Walmart mistake admission illustrates what investor failure looks like: a clear intellectual conclusion (Walmart is great) not acted upon because of a trivial price move. The governance critique illustrates what board failure looks like: clear warning signs not acted upon because of social pressure, fee dependency, and the "checklist" substitution for judgment.

Phil Fisher's death in March 2004 gives the meeting a valedictory quality. The synthesis of Graham and Fisher — which is the intellectual foundation of Berkshire's investment history — is articulated with the nostalgia that proximity to death generates. The Google IPO Owner's Manual is its living parallel: a new generation of entrepreneurs adopting Berkshire's shareholder communication principles.

The derivatives warning is upgraded: "I will predict that sometime in the next ten years, you will have very big problems." This is 2004. The prediction would be fulfilled in 2008.

💡 Philosophical Gems

The Walmart Mistake: The Anatomy of an Error of Omission

What Happened: Buffett began purchasing Walmart stock at approximately $23/share in the late 1990s. The price rose a fraction of a dollar. He stopped buying. "I set a price limit and it moved up. I should have just bought the damn thing."
The Cost: Approximately 100 million shares not bought. By 2004, at ~$53/share, the opportunity cost was approximately $10B in foregone market value. "It's real money even in Omaha." (Laughter)
The Mechanism: When a stock that is clearly great and clearly cheap moves up a percent or two, the instinct is to wait for a dip. This is "thumb-sucking" — passive inaction masquerading as discipline. Real discipline is acting decisively when conviction is high, regardless of short-term price movement.
The Meta-Lesson: Errors of omission don't appear in GAAP accounting. They are invisible to auditors, analysts, and academic studies of investment performance. They are the most expensive category of investment mistake because they compound indefinitely — every year that Walmart grew without Berkshire owning it was additional forgone wealth.
See Errors of Omission, Circle of Competence.

Derivatives: From Warning to Prediction

The Upgrade: The 2002 letter called derivatives "potentially lethal." At the 2004 meeting, Buffett converts the warning into a prediction: "Sometime in the next ten years." He is specific about the mechanism: complexity, mark-to-model accounting, and the inability of senior management to understand their own books.
The Freddie Mac Case Study: Freddie Mac — with outstanding independent directors, world-class fixed-income advisors on the board (Marty Leibowitz, Henry Kaufman), an oversight office, Congressional committees watching, and a major auditor — misstated earnings by $6B. "Most of that was facilitated by derivative instruments." The lesson: sophistication does not protect against complexity.
The Systemic Risk: "When there's a derivative transaction… both sides put on the books a profit. I've never seen one where they both put on a loss." The math of a zero-sum instrument cannot produce aggregate gains — yet the accounting presents as if it can. Eventually the discrepancy forces recognition. At scale, recognition is crisis.
The Berkshire Hypocrisy Acknowledged: "We use them ourselves. We get them collateralized. We've made money off them. But we think they're dangerous as used in society." This is honest: the danger is systemic, not individual.
See Financial Weapons of Mass Destruction, Corporate Governance.

Corporate Governance: Checklists vs. Thought

The Independence Paradox: A director who relies entirely on their board fees for income is classified as "independent." A director who owns $10B of the company's stock (like Berkshire's stake in Coca-Cola) is classified as "conflicted." "The proportionality is absurd. If I'm holding $10B of Coke and receiving $100,000 in board fees, which side of the table do you think I'm on?"
The Checklist Failure: "Checklists are no substitute for thinking." The push to score board composition on independence metrics — whether the director has "business relationships" with the company — produces boards that are formally independent and functionally captured. "It was Bertrand Russell who said most men would rather die than think. Many do."
The Red Balloon Problem: Buffett uses an extended analogy: an apple-sorting machine that triggers on anything red and round works perfectly until a red balloon comes down the conveyer. "The machine has followed its guidelines, but it's not slicing apples anymore." Governance rules are the machine; the balloon is any governance failure those rules didn't specifically anticipate.
The Treasure Standard: Quoting Matthew 6:21 — "Where your treasure is, there your heart will be also" — Buffett argues that directors with skin in the game (own-stock, not options) are effectively more independent than those who are merely fee-dependent under the letter of Sarbanes-Oxley.
See Corporate Governance, Owner's Manual Principles.

The Phil Fisher Tribute: Two Schools, One Synthesis

Ben Graham's Contribution: The quantitative foundation — buying companies at below liquidation value, cigar-butt investing, margin of safety as arithmetic. Still the correct framework for small investors operating in the full universe of securities.
Phil Fisher's Contribution: The qualitative elevation — buying extraordinary businesses at fair prices, trusting management quality as a primary variable, holding effectively forever. Fisher's "Scuttlebutt" method (interviewing competitors, suppliers, and customers before buying) is qualitative due diligence raised to a systematic level.
The Berkshire Synthesis: "I am 15% Fisher and 85% Graham — or maybe 85% Fisher and 15% Graham. It depends on the day." The quantitative rigor of Graham; the qualitative excellence standard of Fisher. "Phil took me from cigar butts to wonderful businesses."
The Living Proof: The Coca-Cola purchase in 1988 (at $6B, 5x earnings before accounting adjustments) was impossible under strict Graham methodology. It required Fisher's conviction that brand-based businesses with global pricing power compound at rates that eventually justify any price above a certain threshold.
See Circle of Competence, Intrinsic Value vs. Book Value.

The Compensation Consultant: A Viper in a Shirtfront

Munger's Standard: "I would rather throw a viper down my shirtfront than hire a compensation consultant." The humor is the argument: hiring someone whose income depends on justifying large compensation packages to advise against large compensation packages is structurally irrational.
The Chihuahua vs. Doberman Boards: Buffett: "Compensation committees don't put Dobermans on them. They put Chihuahuas that have been sedated." The incentives of compensation committee membership — board fees, social relationships, future board invitations — all point in the same direction.
The MidAmerican Standard: Buffett describes creating the MidAmerican compensation plan in three minutes on a yellow pad. "I said, 'Walter, what do you think of this?' He said, 'looks fine.' We told David Sokol. He said, 'Let's make it 50/50 between me and Greg.' That was the entire negotiation." No consultants. No slide decks. No comparable analysis. A fair deal based on understanding the business.
See Corporate Governance, Owner's Manual Principles.

Inflation: Which Businesses Survive

The Good Business Test: A business that can raise prices by 10% without losing customers is an inflation-resistant business. See's Candy. GEICO (if cost structure holds). The Buffalo News (pre-internet). "You want a business that generates a lot of earnings relative to the capital it needs to employ."
The Bad Business Test: A capital-intensive business that must invest $1.50 of new capital for every $1 of revenue growth will find that inflation simply increases its capital requirements faster than its earnings. "The inflation doesn't help them; it just raises the hurdle for staying in the same place."
The Gold Alternative: "We prefer assets that generate cash flows in any currency. See's Candy works whether you pay in dollars, seashells, or anything else." Gold generates no cash flow; its value is entirely dependent on the next buyer's belief in its value.
See Insurance Principles, Circle of Competence, Intrinsic Value vs. Book Value.

🗣️ Verbatim Masterclass

"I sucked my thumb when I should have been buying. It cost us about $10 billion." (The Walmart mistake.)
"Thumb-sucking is a very expensive activity." — Charlie Munger
"I will predict that sometime in the next ten years, you will have some very big problems that will either be caused by or accentuated in a big way by people's activities in derivatives."
"I would rather throw a viper down my shirtfront than hire a compensation consultant." — Charlie Munger
"Checklists are no substitute for thinking." (On director independence.)
"Phil took me from cigar butts to wonderful businesses." (On Phil Fisher.)
"Both of them will be wonderful candidates for the job." (On the Google founders using Berkshire's Owner's Manual as a template.)
"The guy on one side of the table is playing with play money. The other guy is playing for keeps. That's not a symmetrical negotiation." (On CEO compensation.)

🔗 Evolutionary Links

Entities: Walmart, Freddie Mac, MidAmerican Energy, David Sokol, Greg Abel, Walter Scott, General Re, GEICO, PetroChina, Phil Fisher, Google, Deloitte & Touche
Concepts: Errors of Omission, Financial Weapons of Mass Destruction, Corporate Governance, Owner's Manual Principles, Circle of Competence, Intrinsic Value vs. Book Value, Manager Autonomy, Insurance Principles, Dollar Devaluation Thesis

[!TIP] The 2004 meeting is the year the governance critique reaches its sociological maturity. The "checklist vs. thought" formulation is Buffett's most precise statement of why legal reforms (Sarbanes-Oxley, independence rules) cannot cure board capture — because capture is social, not legal. The Walmart mistake is honest in a way that almost no public company CEO ever matches; the derivatives prediction (fulfilled in 2008) demonstrates that the "financial weapons of mass destruction" phrase was not rhetoric — it was analysis. Charlie Munger's viper line is the most quoted sentence of any Berkshire annual meeting.