For six hours on May 4, all eyes in the investment world were focused on Omaha, Nebraska. Warren Buffet, the 88-year-old investment guru known as the “Oracle of Omaha” for his legendary investment picking expertise, took to the stage with right-hand man Charlie Munger, Vice Chairman of Berkshire Hathaway, for the annual Berkshire Hathaway Shareholder Meeting.
Speaking to a rapt crowd of 40,000 shareholders and dignitaries like Bill Gates and Tim Cook, the unflappable twosome tackled over 50 questions on subjects ranging from their recent Amazon investment to how Berkshire will survive after they are long gone.
Berkshire Buying Its Own Stock
The most popular question centered on the topic of stock repurchases. Up until the summer of 2018, Berkshire rarely used their own cash to buy up their own stock. Buffett had maintained a steadfast policy of doing so only if the “Price to Book” ratio of Berkshire slipped below 1.2. In other words, when the price of a dollar of Berkshire assets was under $1.20 per share, Buffet was willing to deploy cash for stock re-purchases.
Last summer, the company changed this policy to allow for greater flexibility. In this recent quarter, Berkshire repurchased $1.7 billion of their own shares. Since stock buybacks could significantly impact the company’s stock price, shareholders were interested in understanding this new approach.
Buffett explained, “We have no intention of spending a dime unless we think Berkshire shareholders will be better off.”
In other words, despite Berkshire sitting on $114 billion, they will only use it to buy their own stock if they think the reinvestment is better than other near-term opportunities. For emphasis, Buffet added, “If the stock is cheap relative to the company’s intrinsic value within a band of 10%, I wouldn’t hesitate in buying more.”
At one point, Munger mentioned that they will be more “liberal” in the amount of buybacks that are made and would be willing to spend up to $100 billion of their cash if it made sense to do so.
Berkshire shareholders should take some solace in knowing that the company has this option at their disposal. It’s hard to calculate a floor (a bottom price) on the stock, but this artillery of cash would potentially lessen a Berkshire stock sell-off.
Has Berkshire Lost Its Edge?
Up until 2014, Berkshire stock had a long-standing record of outperforming the S&P 500 over any 5-year average period dating all the way back to 1965. Over the past decade, the stock did not prevail over the largest U.S. stocks. In fact, since 2009, the S&P 500 attained 314% while Berkshire managed only 259%. Similar to 1999, many are starting to think that perhaps Berkshire has lost its edge.
What happened in 1999 may be the path we are on for 2019. Buffet reminded us that the stock is more likely to beat the S&P 500 in bear markets. There are certainly some similarities between now and then, including a bull market that has passed the 10-year mark, and a strong run for large cap growth stocks.
Between 2000-2009, Berkshire surpassed the U.S. stock market by a wide margin, returning 100% while the S&P 500 returned negative 23%. Notably, this period included some of Berkshire’s best deals: the purchase of Benjamin Moore, Ben Bridge Jewelers, Brooks Sports, Burlington Northern (BNSF) Railroad, Pampered Chef, and Fruit of the Loom, not to mention bailing out Goldman Sachs, GE Capital, and Bank of America.
Buffett also reminded us that he is betting most of his net worth on Berkshire doing well after he is gone. In fact, approximately $85 billion currently sits in his own company stock that would gradually be disbursed to the Gates Foundation over a period of years upon his passing.
Berkshire After Buffett
As the company’s heralded leaders get older, many are anxious about Berkshire’s succession plans and what the management is doing to set the stage for the future.
“By any yardstick you use, I’m going downhill,” Buffett said about aging. He said if he took the SAT test now and compared it with a score from his younger self, it would be “embarrassing.” Still, he added, “I do think I know a lot more about human behavior than I did when I was 25 or 30.”
In 2014, Buffet and Munger appointed Greg Abel and Ajit Jain as their replacements. Since the official hand-off of all Berkshire-owned businesses to these two individuals occurred in 2018, Abel and Jain were invited to take part in this year’s meeting by answering two questions each. Buffet explained that they would participate even more in future years.
Buffett also mentioned Todd Combs and Ted Weschler, reminding attendees that they were currently responsible for $26 billion in stock investment decisions.
In the near term, investors should not fear a Berkshire Hathaway without its top two lieutenants at the helm. As long as there are Buffett and Munger and their formal successors with over five years in play, they will continue to build a cash-generating powerhouse that succeeds for many decades.
Thoughts on Other Investments
When questioned about other possible investment categories and options, Buffett and Munger identified a handful of clear winners and losers.
· Amazon. Buffet and Munger consider Amazon’s Jeff Bezos “a miracle worker.” In fact, Berkshire recently demonstrated its confidence in the e-commerce giant by investing $10 Billion in Amazon during the first quarter of 2019. Despite an assertion that this might not be in line with the company’s traditional “value” investing approach, Buffet assured all that, despite any of the popular ratios often inaccurately used as “value” indicators, his team is still holding true to value investing and considers Amazon a strong value play based on what they invested now and what they anticipate will be returned in the future.
· Google. Bluntly stating his thoughts about the technology behemoth, Munger said, “I feel like a horse’s ass for not finding Google sooner. We saw the results they produced firsthand through Geico ads. We could see how well Google ads were working, and we just sat around sucking our thumbs.”
· Progressive Insurance. Declaring a tremendous respect for this company, Buffet and Munger admitted that Berkshire copies Progressive a little and vice versa. Both companies seem to hold the other in high regard, resulting in a cordial and honorable competition.
· Costco. The company’s success has much to do with its private-label Kirkland brand, which is dominating the packaged-goods space, according to Buffet. In 2018, it had sales of $39 billion, doing 50% more business than Kraft Heinz. (Note that Munger serves on Costco’s board.)
· Elon Musk in the car insurance business. Ideas about branching into car insurance were met with little confidence.
· Bitcoin. Munger stated, “Bitcoin investors celebrate 'Judas Iscariot' at their happy hours.” After bitcoin’s (BTC-USD) price crashed to about one-third of its heyday high, Buffett and Munger joked around about the once red-hot investment and now deem it a no-go opportunity.
· Private Equity. Stories of accounting manipulations have earned a vote of no confidence from Warren and Charlie.
· Alternative Investments. Pension managers beware!
In addition, Buffet and Munger noted that they would love to buy something in the UK or Europe and were convinced that China and the U.S. would eventually get along. There’s too much at stake for them not to.
The Political Climate of Today
At this year’s meeting, Buffet dispelled any doubts about his commitment to the free market democracy. In fact, he made it clear he rejects any U.S. embrace of socialism, stating that “I'm a card-carrying capitalist.”
A longtime Democrat, Buffett said, “You don’t have to worry about me changing in that matter. I also think capitalism does involve regulation. It involves taking care of people who are left behind. I don’t think the country will go into socialism in 2020 or 2040 or 2060.”
As for Brexit, Buffett and Munger share the opinion that the United Kingdom’s chaotic effort to divorce itself from the European Union was a mistake. Even so, it hasn’t lessened Buffett’s desire to buy British-based assets, the billionaire investor said.
As men who’ve experienced many trials, triumphs, challenges and changes over eight decades, Buffet and Munger shared some general life advice with eager attendees.
The Cost of Opportunity
Munger: “You have to make decisions in life with consideration to opportunity cost. Like when you are deciding on who to marry, you must consider the best person who will have you.”
Money and Happiness
Buffett: “If you’re not happy making $50-$100 thousand, you won’t be happy making $50-$100 million.”
Most Valued Things in Life
Buffett: “Time and love. There are only two things you can’t buy, time and love. That’s why we both wanted to be rich. We wanted control of our time.”
Munger: “Anyone is lucky who spends his time doing what he likes doing. It is very important who you collect as your friends and your heroes.”
Judging by the maximum capacity attendance at the annual meeting, Buffet and Munger have clearly stood out as investing heroes to thousands, if not millions. And I, for one, am grateful for their contribution to the investing world because they’ve