May 3, 2009

Jaison T. Blair, CFA

Senior Equity Research Analyst Hardlines Retail jblair@rochdalesecurities.com 203.274.9161

Woodstock for Capitalists - May 2, 2009

Our notes from yesterday's Berkshire Hathaway (NR) annual shareholder meeting are below. These were taken long-hand on a yellow pad, and are my best attempt to capture the essence of Buffett and Munger's comments, so, this is by no means a complete transcript. I hope you find them to be useful and relatively accurate. ON INVESTING: Warren Buffett (WB): Investing is simply that a "bird in the hand is worth two in the bush." You need to evaluate how many birds are in the bush, and how certain are you. WB: An investment should be so obvious that you don't need a calculator or a computer. An attractive opportunity should shout at you. We don't use spreadsheets; we just look for things that are obvious. Charlie Munger (CM): Some of the worst business decisions use elaborate assumptions and models. If you average out the effects of higher math, the net effect is probably negative. They teach it in business school, because they have to have something to teach. WB: Professors won't get tenure if they say "a bird in the hand is worth two in the bush." Greater than two standard deviation events will happen frequently in markets where people get greedy and panicky. CM: Every investment manager he knows and respects . . . every one . . . got creamed last year. WB [On hiring an investment manager to take over for Buffett]: We would not want an investment manager that would hop into cash based on a macro outlook. We can't do it, so we're not looking for someone that thinks they can. WB: [What courses he'd teach if he could create a business school investing curriculum]: 1) How to value businesses; 2) How to think about markets. You would learn that a whole bunch of businesses can't be valued accurately, so avoid them. Understand if competitive advantage is fleeting or enduring. Learn that the market is there to serve you. WB: If you are in the investing business and have a 150 IQ, sell 20 points to someone else. This is a business where need inner peace; need to think for yourself because you are always getting bombarded with noise, stress and feedback. WB: Don't need to understand higher math or law. But, must have emotional stability and make good decisions over time. (Continued on next page)

2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

On investing (continued): CM: There is so much that is false and nutty in modern finance, academia and investing. You will do well if you just reduce nonsense. To quote Max Plank: "Science advances one funeral at a time." CM: Emotional makeup is more important than skill set. Much more important to have only a 130 IQ and a good grip on yourself. Leverage and emotions can cause tremendous problems for investors. Don't want to get pulled out of investments at the wrong time because of leverage or extreme fear. People get affected by looking at prices. We look at the assets to see what they will produce. People do foolish things when they look at quotes to see what to do. We recommend that you read The Intelligent Investor Chapter 8 - The Investor and Market Fluctuations. CM: It is very smart to find investors you think are extraordinary, to study them, and to copy from what they do. The stock market is not as cheap as 1974, but that was a different interest rate environment. '74 was the best period we ever saw. WB: I'm going to be buying investments for the rest of my life, so I get more excited as prices go down. WB: I can't predict what prices are going to do, but I can tell when I'm getting a lot for my money. CM: This is nothing like '73-'74. At that time, I knew I was never going to get another trip to the buy counter like that. Unfortunately, I didn't have much money. WB: Picking bottoms is not our game. Pricing is our game. Any time we like to do something, we really like to barrel in. CM: There will always be people doing foolish things with money. In Las Vegas, people travel thousands of miles to do something with a negative mathematical expectation. People will always do stupid things. The U.S. is a great country to get rich in if you think correctly and rationally. The more people think borrowing on credit cards is smart, the more people will think things like our sales of equity put contracts are stupid. ON REAL ESTATE: WB: Berkshire Hathaway (BRK) owns one of the largest real estate brokerage operations in the Southwest. We are seeing something close to a stabilization in the SW in medium to lower-priced homes at current prices. Houses are moving; mortgage rates are low; and these mortgages are being put on the books at much better terms. WB: In the U.S. we create approximately 1.3 million households per year (though fewer in a recession). During the housing boom, we were adding 2 million homes per year, so we've created an excess of about 1.5 million units. At present, we're building about 500k units per year (vs 2.0 mm during the boom). Housing demand growth will absorb the excess supply. There will be differences by region (South Florida will take longer), but we are currently eating up the excess supply at a rate of about 700-800k
-2 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

per year. So, it should take a couple years of producing less than demand for the housing market to stabilize and housing-related demand to recover. CM: With rates so low, in markets like Omaha that didn't overheat, I would buy housing tomorrow. In the U.S. there are 80 mm homes. 25 mm have no mortgage. Only 5-6 mm are in trouble. We are selling 4-5 million houses per year, and those are going into stronger hands at favorable mortgage terms. If housing starts stay at 500k units per year, in 24 months at most, we should get to equilibrium; maybe much sooner. That will make a big difference in housing-related businesses. Southern Florida will have a problem for a long time. The math is devastating; a lot to wade through. ON INFLATION AND THE DOLLAR: WB: We are certain that we will have inflation over time. Last week, Volcker was upset that the FOMC said it was okay to have 2% inflation. Once you start thinking that 2% is okay, it becomes a slippery slope. Current policies are likely to create inflation. WB: The U.S. borrows from the rest of the world (building up a lot of external debt). The classic response of policy makers is to devalue that debt with inflation. The easiest thing to do is the most likely to happen. People that are paying the AIG bonuses are not the taxpayers but those that are buying fixed dollar assets . . . the Chinese buying U.S. government bonds. Your best protection against inflation is to have the best skill set possible. You will get your share of the economic pie. The second best protection is to own a great company that does not require heavy capital investment. Inflation will kill a company that requires heavy capital investment. We will guarantee you that the U.S. dollar will buy less in 5-10 years. But the same things are happening around the world. All countries are electing (properly so) to run very high material deficits. These are unprecedented levels, except at wartime, to offset the contraction of demand of the populace. This will cause units of currency to buy less over time; won't be soon, but markets may anticipate ahead of time. You can bet on inflation. CM: I remember 2 cent first class stamps and 5 cent hamburgers; prices have gone up a lot over my lifetime, but it was still a generation which created immense wealth. Society can prosper with a little inflation (it's not all bad); however, we need to avoid runaway inflation. The worst case scenario for us from runaway inflation would be nationalization of segments of our business (e.g. auto insurance or utilities). When people get outraged enough, politicians will respond. Wild inflation would be the worst case for us. Consumers hate to see monthly bills going up. Government could take over, but this is a low probability event. Companies that don't require much capital and have a good economic moat will do best during a period of high inflation.

-3 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

ON THE CREDIT CRISIS AND THE GOVERNMENT REACTION: WB: Mid-September, the government was facing a potentially total meltdown -looking into the abyss. Politicians were getting punched from all sides while making policy. This is the nature of an emergency. Going to have decisions that will look back upon and question, but the government is doing well on balance. WB: [Recommends reading Jamie Dimon's letter to shareholders from the 2008 J.P. Morgan annual report which discusses what caused the credit crisis and what might be done in the future.] CM: This is the biggest financial crisis in 70 years. Decisions have been made hurriedly and under great pressure. Government should be judged more leniently when doing things under this kind of pressure. The intent of the government is right. However, we will see consequences. This is not a free ride. CM: There is a climate of hatred in DC towards parts of the finance industry that you could cut with a knife; so we don't know what the new rules will be, but there will be new rules. WB: The biggest pressure right now is that the American public is suffering and mad and want someone to be mad at. There is a fury that is hard to satisfy; it's focused on DC and bankers; DC is going to deflect as much as possible. WB: There may be regulations that make life more difficult. I won't like it, but it's coming. ON THE FUTURE: WB: There are always lots of things wrong with the world but it's the only world we've got. Over time, people will live better and better. We have a system that works and unleashes human potential. We are just getting started on that road. WB: We will have bad years and interruptions of progress of society, but overall we'll move ahead at a really rapid pace. We keep moving forward in fits and starts. WB: Every year we meet will have a bunch of problems, but opportunities outweigh the risks. WB: Your children and grandchildren will live better than you did. CM: We can see on the horizon the final breakthrough that solves the major problems of man. The main technical problem of mankind is about to be fixed. If you have enough energy, you can solve a lot of problems. Overcrowded areas can desalinate, and we can get control of the hydro-carbon problem. ON CHINA: CM: This may be the Chinese Day. WB: Chinese dollar assets are going to build as long as the trade deficit persists. So far, the Chinese have elected to put in U.S. government bonds. Anybody that owns dollar obligations outside this country is going to get less over time. CM: China has one of the most successful economic policies in the world. The rate of
-4 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

advance is so great and meaningful that if they lose a few %age points in purchasing power, its a trifling in the scheme of things. WB: For a lot of years, China did not have a system to unleash human potential. Now they do. On rating agencies and the housing bubble: [WB]: Five years ago, everyone had a model in mind that housing prices couldn't fall. People thought that if I don't buy a house this year, will need to pay more next year. There was an almost total belief that prices would not fall significantly, and may keep rising. Rating agencies priced this assumption into models. They didn't understand the impact of bubbles and leverage. This was a massive problem given that U.S. housing was $20 trillion in an economy with $50 trillion in assets. A great many people made this mistake. Also, if the ratings agencies had started to sound an alarm 3-4 years ago, Congress would have pressured them to write up the value of the assets, and called such concerns un-American. [CM]: Ratings agencies eagerly sought stupid assumptions. On the consumer and BRK's retail businesses: Our retail businesses were hit hard. There has been a big change in consumer behavior that will last a lot longer. Our retail businesses won't be great for a long time. Shopping center and mall vacancies will be hard to fill. We are not looking for a quick rebound. On newspapers: We would not buy most newspapers in the U.S. at any price. You have a probability of unending losses. 20-30 years ago, these were the ultimate businesses - pricing power; essential to advertisers and customers. Newspapers were impregnable from advertiser pressure. But, they are only essential to advertisers as long as they are essential to readers. We don't see anything on the horizon that will cause this to improve. On insurance and the AIG debacle: In insurance, giving your pen away is extremely dangerous. You can do enormous damage in insurance with a pen. On activism: When we buy a stock, we don't count on being able to change the course of action. On shutting down operating companies: As long as companies won't generate unending losses, and don't have employment problems, we won't sell or close a business. On financial conservatism: Our definition of comfortable is very comfortable. We want to have billions and billions and billions around and then we'll think about what to do with them. On share repurchase: 90% of the share repurchase activity (of other companies) in the past five years did not serve shareholders. There are a massive number of companies that were buying stock at twice the current price that won't buy back today. On advertising and Geico: A brand is a promise. We want everyone in the U.S. to have in mind that Geico can save important money by calling Geico. Once we get that in someone's mind, it can pay off big; don't know when, but it will. The value of Geico goes up far more than the earnings each year. We could probably maintain our customer base wtth $100 mm of ad spending, but we're happy to spend $800 mm and
-5 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

would spend even more. Geico is the low cost producer in something people have to buy and a relatively high ticket item at about $1,500. On GAAP and banking: Accounting principles allow banks to show big increases in earnings by making huge amounts of low quality loans. This creates an incentive to take big risks. Black boxes can produce big numbers, but sure as hell not much cash; can produce big trouble if collateral problems. New regulation that is coming would not be needed if accounting was better, especially for banks. On BRK's credit rating: There can be no stronger credit than BRK. Meeting obligations is sacred to us and more important than EPS. We have obligations like workmen's comp that go out 50 years; those people need those checks. That is sacred. Munger on Buffett when they disagree: "In the end you'll see it my way because your are smart and I'm right." On Return Expectations for BRK: [WB]: We hope that we can generate a few %age points of intrinsic value better than the S&P. When we setup the partnership we wanted 10%age points of outperformance, but that's impossible with big money. If we can beat by a couple points a year, I'll feel good about that. [CM]: The lollapalooza financial results are history. On BRK's structure: [WB]: We can move money around without tax consequences. This is a real advantage in allocating capital that a shareholder cannot do as efficiently. [CM]: Wall Street sells spin-offs to get fees. But, if regulation was crazy enough, was hurting the organization, and tying the hands of subsidiaries that were un-related to the regulation, we might consider splitting the company in two parts. On corporate boards: When compensation is an important part of a director's well being, he is not going to be independent; these are oftentimes considered the independent directors. On layoffs: The ideal model is a business that is so strong that can operate with shared hardship rather than layoffs. However, sometimes you need to amputate a limb to save a life. On competitive position: A lot of moats have been filling up with sand (e.g. newspapers and network television).

-6 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

Rochdale Securities LLC 750 E. Main St., 7th Floor Stamford, CT 06902 Main 203.274.9100

Management
Dan Crowley President djc@rochdalesecurities.com 203.274.9101 Kevin Cassidy Senior Vice President Chief Operating Officer kjc@rochdalesecurities.com 203.274.9116

Trading
Kris Talgo Senior Vice President Trading Co-Head klt@rochdalesecurities.com 203.274.9125 Hal Tunick Senior Vice President Trading Co-Head ht@rochdalesecurities.com 203.274.9124

Analyst Team
Richard X. Bove Vice President Equity Research Financial Sector rbove@rochdalesecurities.com 813.909.1111 Jaison T. Blair, CFA Sr. Equity Research Analyst Hardlines Retailing jblair@rochdalesecurities.com 203.274.9161 Hayley B. Wolff Sr. Equity Research Analyst Consumer - Leisure hbw@rochdalesecurities.com 203.274.9160

Merger Arbitrage and Special Situations

Barry D. Kaplan Merger Arbitrage and Special Situations bdk@rochdalesecurities.com 203.274.9121

Institutional Sales
Hal Tunick ht@rochdalesecurities.com (203) 274-9124 Joseph Bove jab@rochdalesecurities.com (813) 963-2999 Robert Camardo bc@rochdalesecurities.com (203) 274-9122 Trey Bauer Patrick Burke tbauer@rochdalesecurities.com prb@rochdalesecurities.com (203) 274-9137 (203) 274-9127 Andy Massey apm@rochdalesecurities.com (813) 963-2888 Pete Doehla pkd@rochdalesecurities.com (203) 274-9128 Allen Jordan anj@rochdalesecurities.com (203) 274-9120

David Miller Niall Morrissey dmiller@rochdalesecurities.com nmm@rochdalesecurities.com (203) 274-9131 (203) 274-9130 Jeff Wicker jdw@rochdalesecurities.com (925) 253-1030

-7 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.

Sunday, May 03, 2009

Woodstock for Capitalists - May 2, 2009

ROCHDALE SECURITIES - DISCLOSURE INFORMATION Rochdale Securities LLC ("Rochdale") is an institutional brokerage firm that does not make a market in equity securities and does not engage in investment banking. Rochdale and its affiliates, including its principals, may own securities of the companies which are subject of this report but do not own 1% or more of any class of common equity securities of any subject company. The information and opinions presented in this report are provided for informational purposes only and are not to be used or considered as an offer or solicitation of an offer to buy or sell securities or other financial instruments. Rochdale has not taken any steps to ensure that the securities referred to in this report are suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about any such investment. Information and opinions presented in this report have been obtained or derived from sources believed by Rochdale to be reliable, but Rochdale makes no representation as to their accuracy, timeliness or completeness. Rochdale accepts no liability for loss arising from the use of the information presented in this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information and opinions contained in this report reflect a judgment at its original date of publication by Rochdale and are subject to change without notice. Rochdale may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and Rochdale is under no obligation to insure that such other reports are brought to the attention of any recipient of this report. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Rochdale to any registration or licensing requirement within such jurisdiction. All material presented in this report is the property of Rochdale and is under copyright to Rochdale. This report may not be reproduced, distributed or published by any person for any purpose without the prior express written consent of Rochdale. RR RATINGS DISTRIBUTION BUY HOLD SELL 22.8 48.3 28.9

RATINGS FOR STOCKS Buy Company has demonstrated that it is a value creating concern; the return on capital (as adjusted) exceeds its cost of capital. Stock is currently trading in a range that does not exceed its intrinsic value. Stock is expected to out-perform the market over the next twelve months. Hold/Neutral Company either is not creating value (i.e., its costs exceeds its return on capital) or it is trading at a price equal to or in excess of its intrinsic value. Expectation is at best stock will perform in-line with market. If not currently held, stock should be avoided. Sell Company's cost of capital exceeds its return on capital; and the company has no intrinsic value or is trading at a significant premium to its intrinsic value. Expect stock to under-perform the market over next twelve months.

-8 2009 Rochdale Securities LLC. All rights reserved. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED AT END OF THIS REPORT.