2006 Annual Meeting Summary

The 2006 Berkshire Hathaway Annual Meeting — held May 6th at the Qwest Center in Omaha, with approximately 24,000 attendees — is defined by one stage-setting introduction: the formal presentation of ISCAR's leadership to the shareholder family. What follows is a wide-ranging Q&A that returns repeatedly to two gravitational ideas: the "filter" that screens for quality in acquisitions (non-auction = quality management), and the structural argument against the investment management industry's fee structure. On the margins, 2006 also delivers Buffett's sharpest nuclear-risk discussion, his most detailed housing-bubble warning, and Munger's now-legendary dismissal of ethanol as "stupid."

Opening Context

Buffett opens by invoking the "Anna Nicole Smith Rule" (the joke about why Munger always gets the girl in the annual movie), then formally introduces ISCAR's leadership team: Eitan Wertheimer and Jacob Harpaz address the 24,000 attendees. The ISCAR video ("In 61 Companies Around the World") plays in the arena. Buffett's framing sets the thematic agenda for the Q&A: "In this world, in which many businesses get auctioned off... we continue to hear from people who consider their business too important to auction."

Key Discussions

🏭 ISCAR: Berkshire's First International Business

Buffett recounts the origin story: a 1¼-page letter from Eitan Wertheimer in October 2005. "Character and talents sort of just jump off the page at me, and this was one of those letters, and it came from Israel."
Jacob Harpaz describes ISCAR's strategy: "We are not only selling tools, we are selling technology. We are selling the customer a better way to make profit."
Eitan Wertheimer to the crowd: "I'm standing here before you representing 5,869 people — not only the people, but the families, their past and their future."
Munger: "This is a company that, from very modest beginnings, grows to be the best company in its field in the world. The average quality of the people in this company is not only extraordinary, it's off the chart."

🔍 The Non-Auction Filter

Buffett articulates the filter thesis explicitly: businesses that are "too important to auction" select simultaneously for quality of business AND quality of manager.
"There is something going on in their brain that says this business is so important, and the people that are here are so important... that we actually care about the home in which these businesses reside."
Buffett confirms: Berkshire has never bought a major business at a competitive auction. The non-auction approach is not mere restraint — it is the strategy.
Munger: "None." (When asked if he could recall one auction-sourced acquisition.)

💰 Compensation: The Cyclical Business Problem

Question on designing fair compensation for cyclical industries (when profits swing with commodity prices beyond management control).
Buffett: "If oil is $70 a barrel, I don't think any particular management deserves credit for it." Compensation should track what management controls: cost of production, finding costs, operational efficiency — not market prices.
GEICO example: bonuses tied to unit growth and profitability of seasoned business. New business costs are excluded from the calculation to avoid penalizing growth.
Munger: "About half of [American corporations] have grossly unfair systems in which the top people get paid too much."
On envy vs. greed: Buffett argues envy drives outsized compensation more than greed — "You can hand somebody a $2 million bonus, and they're fine until they find out the person next to them got 2-million-1, and then they're sick for the next year."

🧠 Culture as the Training Program

Q: "How do you train your successors?" Buffett's answer: you don't. Berkshire's culture is transmitted through behavior, not manuals or mentoring.
"This meeting, in terms of what we do, is intended to give a personality and a character to Berkshire." Everything visible to managers — letters, meetings, decisions — is the "training."
Munger: "At headquarters, we aren't training executives. We find them. And they're not hard to find. You know, if a mountain stands up like Everest, you don't have to be genius to recognize that it's a high mountain."

📊 Technology and the "Too Hard" Pile

Q: What have you learned about IBM, Sun, Oracle, Dell, EMC, Intel?
Buffett: "What I've learned is I know enough not to know enough to make an investment decision." Technology businesses are, by definition, in the set where Buffett cannot reliably predict what the business looks like in 5–10 years.
Charlie: "It's not a competency if you don't know the edge of it."

📈 The 2-and-20 Industry Bet

Buffett publicly announces a wager: he will stake a "significant sum of money" against anyone who names ten hedge funds ($500M+) that, after fees, beat the S&P over ten years. No takers in 2006.
The argument for choosing an investment manager: "I think I do know how to pick a few that will do well." The key criteria: past performance in context, personality, honesty. But institutional buyers (pension funds) cannot reliably apply these criteria when 50 people are calling on them simultaneously.
Munger: "I think it ought to be a crime to entertain, in any way, a state pension fund official."

🌽 Ethanol: Munger Calls It "Stupid"

Buffett: "I know we don't know enough to evaluate ethanol projects." The commodity processing economics are historically poor; competitive advantage over a given plant is unclear.
Munger: "I have just enough glimmers of thermodynamics left in me to suspect that it takes more fossil fuel energy to create ethanol than you can get out of the ethanol you've created. If so, that's a very stupid way to try and solve an energy problem."
Buffett's diplomatic exit: "I have friends who like ethanol, and I have friends who don't like ethanol. I want my position to be perfectly clear: I'm for my friends."

🏠 The Housing Bubble Warning

Buffett identifies specific warning signs in south Florida: listings in Dade/Broward counties went from under 9,000 (Dec 2004) to 30,000 (2006); monthly sales fell from 2,900 to under 2,000.
"30,000 listings at $500,000 average is $15 billion worth of properties. You are looking at a market that can get real discontinuities."
Source of the bubble: investment/speculative buyers (not owner-occupiers) in high-end markets; "teaser" mortgages and adjustable-rate structures that defer payment.
Munger: "Some of this dumb lending is being facilitated by contemptible accounting. The accounting profession has not stopped compromising its way into terrible behavior."

☢️ Nuclear Threat: "The Ultimate Problem of Mankind"

Buffett agrees with the asker that nuclear terrorism is the most serious long-run risk: "We've always had evil people… since 1945, the potential for inflicting enormous harm has increased at a geometric pace."
The genie is out: knowledge is spreading, materials are accessible, deliverability is harder to constrain. "Only one of them has to succeed."
Munger: "I think the chances we'll have another 60 or 70 years with no nuclear devices used on purpose is pretty close to zero."

🇷🇺 Russia: "A Little Hard to Develop Confidence"

Buffett recounts the Salomon-era experience: "We sent the money in [for oil wells in Siberia]. As long as we were drilling, we were welcome. Then when we wanted to start taking the oil out, they weren't quite as friendly." Workers were physically threatened.
Breakfast with Mikhail Khodorkovsky in Sun Valley (2003): "He went back to Russia, and he's been in jail now for just about ever since." Yukos bankrupt.
"I don't think it's any certainty that the world has changed permanently [in Russia] in terms of its attitude toward capital, particularly outside capital."

Quotes

"Character and talent sort of just jump off the page at me, and this was one of those letters, and it came from Israel." — Buffett on Eitan Wertheimer's letter

"It's not a competency if you don't know the edge of it." — Charlie Munger (on knowing the limits of your circle)

"That's a very stupid way to try and solve an energy problem." — Charlie Munger on ethanol (corn-to-fuel EROEI)

"We aren't training executives. We find them. And if a mountain stands up like Everest, you don't have to be genius to recognize that it's a high mountain." — Charlie Munger on succession

"I think it ought to be a crime to entertain, in any way, a state pension fund official." — Charlie Munger on investment management conflicts of interest

"The people that pass through that filter of caring enough about their business that they don't put it up like a piece of meat at an auction are also the people that make the best managers and partners over time." — Buffett on the non-auction filter

🎤 2006 Annual Meeting: "The Filter and the Family"

"In a world in which many businesses get auctioned off... there are also people who consider their business too important to auction. We've never really bought one at auction — have we, Charlie? Can't remember one either." — Warren Buffett & Charlie Munger, 2006

🎭 The Narrative Context

The 2006 meeting is a celebration staged with unusual deliberateness. Buffett and Munger have just closed Berkshire's first foreign-headquartered acquisition — a company whose founder cold-wrote a letter to Omaha on the strength of Berkshire's reputation alone. The ISCAR introduction is not merely an update; it is a demonstration of thesis. Here, live on stage, are the Wertheimers — a manufacturing family from Israel — choosing Berkshire over every banker and private equity firm in the world because Berkshire does not auction. The crowd of 24,000 shareholders is watching the machine it has funded prove its logic in real-time.

What follows is a Q&A that circles the same gravitational center from multiple angles: culture, compensation, succession, fees, risk. The meeting's deepest contribution is the "filter" articulation — the clearest statement Buffett ever gives of why Berkshire's non-auction philosophy is not just ethically attractive but economically superior. Quality managers and quality businesses are selected by the same screen.

💡 Integrated Philosophical Gems

The Philosophy: "The Non-Auction Filter"

The Logic: In any market with an auction, the highest bidder wins. In businesses, the highest bidder is usually either (a) the buyer who is most wrong about value or (b) the buyer who intends to cut costs destructively to justify a high price. Owners who understand this reject the auction.
The Insight: The filter works both ways. An owner who passes up more money to sell to Berkshire is demonstrating that they prioritize stewardship over extraction — which is precisely the temperament that created a great business in the first place, and will continue to run it well post-sale.
The Quote: "There is something going on in their brain that says this business is so important... that we actually care about the home in which these businesses reside. And I think that filter works very much to our benefit."
See Buyer of Choice, Manager Autonomy, ISCAR, TTI.

The Philosophy: "Culture is the Training Program"

The Logic: Formal mentoring, management manuals, and succession programs assume that culture is a transferable artifact — something that can be documented and installed. Berkshire's thesis is that culture is a living organism, reproduced by daily behavior, not by documentation.
The Insight: The annual meeting itself is part of the training program. Every letter, every public statement, every management decision that becomes visible to Berkshire's subsidiary CEOs is "training." The CEO does not need to be physically present because the culture is present in every communication.
The Quote: "This meeting, in terms of what we do, is intended to give a personality and a character to Berkshire... the written word, what they see, what they hear, what they observe — that is training in itself."
See Owner's Manual Principles, Acquired Culture, Manager Autonomy.

The Philosophy: Cyclical Compensation — Control the Controllables

The Logic: Great compensation systems measure what management can actually influence, not what markets deliver. An oil CEO who profits from $70/barrel oil while finding reserves at above-industry cost is being rewarded for someone else's work (OPEC, supply chains). An oil CEO who finds reserves at below-industry cost while cash prices are low is being penalized for someone else's decisions.
The Insight: Buffett's compensation philosophy is, at its core, a causal philosophy. Reward effort and skill that caused outcomes. Don't reward luck or market timing; don't penalize bad timing. The GEICO bonus system (unit growth + profitability of seasoned business) is the model.
The Quote: "We try to understand the industry in which they operate, and we try to understand the things that the manager can have an impact on, and how well they're doing in that."
See Corporate Governance, Manager Autonomy, Owner's Manual Principles.

The Philosophy: The "Too Hard" Pile as a Competitive Advantage

The Logic: Every investment framework has an effective range — a set of businesses it can analyze with genuine insight. Technology businesses change fast enough that even the best minds in the industry cannot reliably forecast their economics 5–10 years forward. Buffett and Munger's "too hard" box is not a failure — it is the boundary condition that makes the rest of their decisions reliable.
The Insight: "It's not a competency if you don't know the edge of it." The meta-skill is knowing your own limits precisely. Buffett has no inferiority complex about missing Intel's $50 run — he cannot know which "hot" technology businesses justify the price at any given point.
The Quote: "We are best at the businesses where we can come to a judgment that they're going to look a good bit like they do now five years from now, ten years from now."
See Circle of Competence, Intrinsic Value vs. Book Value.

The Philosophy: The Speculative-to-Fundamental Transition in Commodities

The Logic: Every commodity boom begins with fundamentals (genuine supply shortfalls, real demand acceleration). At some point, price history attracts speculative capital that has no connection to fundamentals. The speculative phase pushes prices far beyond what fundamentals justify. The difficulty: there is no clock on the wall.
The Insight: Buffett's Cinderella analogy is his most vivid description of speculative blow-offs: "The punch bowl is flowing and the dance partners are getting prettier all the time. And you know at midnight it's going to turn to pumpkins and mice. But everyone thinks they're going to get out at midnight." The housing market and copper are both invoked as 2006-era examples.
See Margin of Safety, Behavioral Finance, Circle of Competence.

🏢 Tactical Discussions

Q1 Earnings: Record first quarter across all four major business segments; storm seasonality reminder (third quarter is the real catastrophe exposure window).
Reinsurance Rates: Post-Katrina/Rita/Wilma, Gulf Coast marine rates up dramatically after $15B losses on $2.5B premiums. Catastrophe pricing: "If the last two years are the relevant years, we're not getting enough. If the last hundred years are the relevant years, we're getting plenty."
Clayton Homes / Manufactured Housing: Industry volume at 40-year lows. Clayton performing far better than competitors due to financing discipline. Buffett: "Clayton could easily be the largest homebuilder in the United States in future years." Munger: stick-built efficiencies (aided by MiTek) are the real competitive threat.
NetJets: Has grown 5x since acquisition; losses have been persistent despite best-in-class service and safety standards. Buffett: "Rich Santulli... works 16 hours a day. There's nobody in the world I would have run that except for Rich."
Coca-Cola: Buffett regrets not selling at the "silly" 1997–98 prices (50x earnings). Today, earnigns quality is higher than then. "We'll own it ten years from now, in my view."
Social Security: Both Buffett and Munger dismiss the "crisis" framing. In a country with $40,000 GDP per capita and a growing pie, providing for the elderly is "child's play." The unified-budget hypocrisy is highlighted: politicians count Social Security surplus as deficit reduction now but treat future Social Security obligations as a separate scare.
Susan Decker: New board member from Yahoo! (CFO, age 44). Scores highly on all four Berkshire board criteria: owner-oriented, business-savvy, interested, truly independent. Age is an explicit plus.

🗣️ Verbatim Masterclass

"It's the 'Anna Nicole Smith Rule.' When choosing between two old rich guys, pick the older one." — Buffett (opening joke about the annual movie)
"This is a place where the faith is going to go on for a long time. Of course, at headquarters, we aren't training executives. We find them. If a mountain stands up like Everest, you don't have to be genius to recognize that it's a high mountain." — Munger (on succession)
"I'm no genius, but I'm smart in spots, and I stay around those spots." — Tom Watson Sr. (quoted by Buffett on circle of competence)
"It's a good habit to trumpet your failures and be quiet about your successes." — Charlie Munger (on the silver investment)
"The best thing you can do is reduce your expectations." — Charlie Munger (advice to young investment professionals aspiring to be Buffett)
"Envy is probably the silliest of the seven deadly sins because you don't feel better. Now, gluttony — I've had some of my best times while being gluttonous. There's a real upside to gluttony." — Buffett (on CEO compensation psychology)

🔗 Evolutionary Links

Entities: ISCAR, Eitan Wertheimer, Jacob Harpaz, TTI, GEICO, Tony Nicely, Ajit Jain, General Re, Clayton Homes, Kevin Clayton, NetJets, Rich Santulli, MidAmerican Energy, David Sokol, Greg Abel, Susan Decker, Lou Simpson, Walter Schloss, Charlie Munger
Concepts: Buyer of Choice, Non-Auction Strategy, Manager Autonomy, Acquired Culture, Owner's Manual Principles, Corporate Governance, 2-and-20 Fee Structure, Circle of Competence, Float, Retroactive Reinsurance, Succession Planning, Compensation Logic, Behavioral Finance

[!TIP] The deepest lesson of the 2006 meeting is that Berkshire's culture is not just a management philosophy — it is an acquisition algorithm. The same visible commitment to permanent ownership, operational autonomy, and non-auction process that earns Berkshire trust from Seth Weingarten in Omaha also earns it trust from Eitan Wertheimer in Israel. Culture travels even before the plane does.

See also: 2006 Letter, 2005 Meeting, 2007 Meeting