Content provided by Kostya Etus, CFA, CLS Portfolio Manager
May is a momentous month for Omaha. Value investors from around the world make a pilgrimage to see the “Oracle of Omaha,” Warren Buffett, and his partner in crime, Charlie Munger, and to hear their words of wisdom at the annual Berkshire Hathaway Shareholders’ Meeting. It draws such a huge and diverse crowd that it has been uniquely nicknamed the “Woodstock of Capitalism.” For many of us investment professionals, it is almost a sin not to attend the meeting because the knowledge gained is priceless. Here are some brief highlights that stood out this year.
- On the Wells Fargo scandal: Buffett warned managers and business owners to be careful of what they incentivize; it could unknowingly be bad behavior. He also noted the CEO caught wind quickly and acted. Buffett compared his response to that of the CEO of Salomon, a financial firm taken down by a bond trading scandal in the 1990s that was ultimately righted by Buffett. Salomon’s CEO never acted to correct the bad behavior in the company — an omission, Buffett said, that was almost more important than the transgression.
- AMAZING QUOTE #1: Munger likes Ben Franklin’s old quote: “An ounce of prevention is worth more than a pound of cure.” But, Buffett added: “A pound of cure applied is worth more than a ton of cure delayed.”
- On choosing a great business: Buffett had three points to consider. 1) Five to 15 years into the future, does the competitive advantage persist? 2) What kind of management is at the helm? 3) Finally, what’s the price?
- AMAZING QUOTE #2: Buffett’s idea of a great business to buy: “An economic castle with a moat and a great knight to ward off marauders [competition].”
- On fixing the unfixable: Buffett and Munger both said they have learned a lot from their mistakes. Many of their early investments were in failing companies, which they tried to recover. That was a big mistake, they said, as the companies were unrecoverable. They learned to avoid such companies and focus on higher quality investments.
- On finding value: Munger said it used to be a lot simpler to find undervalued companies and lower hanging fruit (“Shooting fish in a barrel,” Munger mentions). Now, they have to reach for higher branches.
- AMAZING QUOTE #3: I’m paraphrasing Munger here: “Rule 1: Fish where the fish are. Rule 2: Don’t forget Rule 1. We have gotten good at fishing where the fish are, but there are a lot more boats on the lake.”
- On intrinsic value: Buffett predicted over the next 10 to 20 years, market value will not be dependent on the economy or presidents, but on interest rates. At current rates, the value is not as high as it has been over the last 10 years. If anyone thinks rates can’t stay low for too long, he said, they just need to look at Japan.
- On Berkshire’s advantage: Buffett and Munger disagree on something, a rare occurence. Buffett says Berkshire is a great company, but if investors don’t want to worry about money or whether they’re invested the right way when their neighbor is making a ton of money on a hot stock, nothing beats the S&P 500 Index. Munger says Berkshire is still better!
- AMAZING QUOTE #4: Munger says: “Others are trying to stay brilliant; we are trying to stay rational. This is particularly important when gambling.”
- On technology: Buffett said it’s very hard to predict how technology will change. Berkshire made huge mistakes by not investing in Amazon or Google, but instead investing in IBM, he said. As for their investment in Apple, they view it as more of a consumer products company.
- On the top five companies: The largest companies by market cap all have low capital intensity. They don’t need capital and they have no tangible assets. No additional reinvestment is needed to grow. This is a huge change from not too long ago when companies made money to build new plants in order to grow. Today, Google charges every time a human clicks a mouse, much different from taking months to search for the right site for a new manufacturing plant. This trend will continue, but of course not everyone will win.
- On Berkshire’s value to the world: Companies under Berkshire are able to operate without fear of being bought by someone else. They have easier access to credit and funding for new projects. CEOs of the companies are freed up from calls with banks and analysts, and can focus on operations. In addition, Berkshire teaches the public about the importance of corporate honesty and the benefits of well-run companies.
I leave you with my two personal favorite things from the meeting:
- An opening video featuring famous actors, as well as Munger and Buffett that only attendees could view. It will never be available for distribution, and it was quite entertaining.
- Munger randomly started chomping away on peanut brittle into the microphone while Buffett was speaking. Hilarious!