This past Saturday, May 2, the first ever virtual Berkshire Hathaway shareholder meeting took place as scheduled. And while it admittedly didn't feel like the meetings of years past, it can best be summarized as he has no idea what will happen, but don't bet against America and the way you do that over the long-term is via equities.
Warren Buffett, 89, sat alone at a table at the front of an essentially empty room, noticeably absent was his partner of 60 years Charlie Munger. Buffett noted that Charlie is in good health and getting along just fine using Zoom for meetings from home: "...he's just skipped right by me technologically" he joked, "But that really isn't such a huge achievement. It's more like, kind of stepping over a peanut or something." To Buffet's left was Greg Abel, vice chairman of all operations except insurance and one of his future successors.
Never Bet Against America
- While potential outcomes on the health side have narrowed somewhat, the economic side is still wide open. We are in completely uncharted territory and it is hard to gauge which direction things will go and who will be temporarily impaired vs those that will see permanent damage.
- Regardless, he remains convinced just as in the aftermath of World War II, the Cuban Missile Crisis, 9/11 and the Great Financial Crisis "the American magic has always prevailed, and it will do so again... nothing can basically stop America."
- During the Great Depression which began in 1929, the Dow Jones fell 83% in 2 years, and 89% from the peak. 4000 banks failed, and a lot of people's savings were completely wiped out (Federal Deposit Insurance Corporation (FDIC) didn't exist until 1934). Had enormous impact on the behavior and psyche of the entire population, the lessons of which many carried for the rest of their lives. It took 20 years for the market to get back to where it was, and the economy trudged along for much of that time. Contrast that with today, where we are asked to endure a few months of social distancing and pausing the economy - if our ancestors could endure, persevere and prosper from the Great Depression, we can get through this.
- The Dow Jones didn't hit 400 again until the 1950s and there were congressional hearings on whether or not it was sustainable or were we headed for another Great Depression. Despite the angst among politicians at the time, the Dow has since reached roughly 24,000 - so it has produced about $100 for every dollar invested and all you had to do was "believe in American just by that one cross-section of America, you didn't have to read the Wall St. Journal, you didn't have to look up the price of your stock, you didn't have to pay a lot of money in fees to anybody, you just had to believe that the American miracle was intact. Never bet against America, and it is as true today as any other time throughout our history. It hasn't all been smooth sailing of course, we have had our share of trials and tribulation around racism, sexism, equality, but we are making progress even if it doesn't always move as quickly as some would like, but you can't argue we aren't better off than we were in 1776."
- If you were to pick one place to be born in the history of the world, regardless of sex, intelligence, special talents or lack there of - you would pick America just like people have been doing for over 230 years. Even the most optimistic person out of the 4 million Americans in 1790 wouldn't have been able to imagine what we have accomplished and the progress we've made despite adversity - the automobile, airplanes, advances in education, medicine, entertainment, etc. Household wealth has increased 5000x since that time from roughly $1 billion to $100 trillion despite losing heavy portions of working class males to wars in that time.
Equities Are Best Long-term Investment in America
- The tailwind will rise again, and "you'll get a fine result if you own equities over a long period of time... they're going to outperform Treasury bills, they're going to outperform that money you've stuck under your mattress." Equities are a very sound investment, but not to be confused with gambling.
- On buying businesses: Stocks are just part of a business, not a lottery ticket. Some businesses won't succeed, but many will grow over time. But just because stocks are liquid and you can always see the price minute by minute doesn't mean you need to have an opinion about them from minute to minute. He used the analogy of a farm to illustrate his point: you own a farm and you have a neighbor that owns an identical farm to yours. Every day, your neighbor says I will either sell you my farm or buy yours for $x price. But you just have to remember thathe is there to serve you, but not instruct you.You originally bought the farm because of what it could produce, despite good and bad years. Maybe he'll name a high price one day that you like and you sell if it suits you at the time, or he'll name a very low price and you buy his farm from him, but the point is you don't have to (and don't want to) put yourself in a position where you are forced to do so.
- On the right temperament for investing: "Stocks have this enormous advantage of people yelling out prices all the time to you, and many people turn that into a disadvantage, and of course many people can profit in one way or another from telling you what this farmer's going to yell out tomorrow or next week or next month." But the fact of the matter is that if you liked a business and its management team and the business hasn't fundamentally changed then there is no reason to go selling it.
- Most people should stick to indexes: Via equities everyone is able to bet on America, although most people shouldn't be picking individual stocks and instead look to just take a cross section of the whole economy and buy an index like the S&P 500. It is very challenging psychologically to not get caught up in rising and falling prices but instead stick to your independent evaluation despite the fluctuations. As he always says, investing is simple but it is not easy. "Some people can handle it psychologically. If they can't handle it psychologically then you really shouldn't own stocks, because you're going to buy and sell them at the wrong time."
- Berkshire doesn't buy passive indexes, they are in the habit of buying entire businesses when possible, but otherwise buying a piece of the business. "And with that I hope I have convinced you to bet on America. Not saying that this is the right time to buy stocks if by "right" that they're going to go up instead of down. I don't know where they're going to go in the next day, or week, or month, or year. But I hope I know enough to know I think I can buy a cross section and do fine over 20 or 30 years.
- Why do you have so much cash, why aren't you betting yourself? "I'm not recommending people buy stocks today or tomorrow or next week or next month, I think it all depends on your circumstances. Buy you shouldn't buy stocks unless you expect, in my view, to hold them for a very extended period and you are prepared financially and psychologically to hold them, the same way you would hold a farm..."
On Economy & Markets:
- "I don't believe anybody knows what the market is going to do tomorrow, next week, next month, next year," but even though you have to bet on America you still need to be careful where you put those bets because when it comes to markets you just never know what might happen. Over long periods the American tailwind will push us forward, but that doesn't mean it will blow every single day and there will be many bumps along the way. One of the best ways to ensure you can navigate the bumps is to minimize debt - "we literally try to think of the worst case of not only one thing going wrong, but other things going wrong at the same time."Plan for the worst, hope for the best. This wasn't a matter of nobody seeing it coming, it is just that nobody listened to those that were ringing the bell and even those that did never really did anything about it. The fact of the matter is you just don't have any idea what is going to happen, but you must take into account not only the frequency but the severity of any given risk.
- Now what we saw in mid-March was when the financial system was stretched to it's limit and many companies were about to be frozen out of the market before the Federal Reserve stepped in. Most companies had been allowing debt to creep up in order to maximize equity returns and all of a sudden everyone went to go draw money out of their lines of credit at the same time the market nearly froze up entirely, which sent fear rippling through market participants. Buffet goes on to say what a great job Jay Powell did at the Fed, the consequences of expanding the Fed's balance sheet so drastically won't be apparent until much later down the line, but he saw the consequences of doing nothing as much worse.
- On potential of negative rates in the US: Not likely but doesn't rule it out, doesn't understand how you can just print as much money as you want and create no inflation but he's not sure there was any choice really. Default is impossible when you borrow in your own currency, you can simply just print more money to pay back your debts which will reduce purchasing power (inflation) but not a technical default.
- Thoughts on the banking sector: Generally in very good shape and FDIC has $100 billion in reserves which differentiates the current situation from 2008, so unlike then banks aren't adding stress to the system. There are some improbable scenarios that would put strain on banking system but feels outside of energy loans and some consumer credit they are well reserved. He isn't too worried as a large owner of bank stocks.
- On wealth inequality: Bill Murray asked how they could take care of all the amazing people that he calls pandemic war veterans. from healthcare, food supply, deliveries, community services, teachers, etc? We are a very rich country and those people contribute much more than someone that arbitrages bonds (Warren admits he falls in the latter category). They must be taken care of and we need to move as a society towards helping out more but it is also worth noting that if you were ever going to be in the bottom 20% there is no time greater than present day.
- Thoughts on capitalism? "The market system works wonders, and it's also brutal if left entirely to itself." It is marvelous in many respects and it got us where we are today, but it needs government to regulate because unfettered capitalism is a disaster. We have to question whether it is a good idea to "all draw straws again for particular market based skills." It encourages people to think hard and work hard, but there is a lot of randomness that some perceive as unfair (inherited wealth) but we should be able to take the best parts and make sure everybody participates in the prosperity.
- Will Berkshire change for the worse once Warren and Charlie are gone? Buffett is very confident it won't, Greg, Ted Weschler and Todd Combs are excellent allocators of capital. Greg currently manages businesses with over $150 billion in revenues in more than a dozen industries with over 300,000 employees.
- On speculation of Berkshire being broken up (especially given all the modern activists), what is the case for leaving it as is? First of all the tax bill would be huge unless structured them as spinoffs, but primary reason is the ability to move capital around and doing things in insurance (mainly their catastrophiccoverages)"the interaction of being able to move capital around in terms of being able to do things in insurance that we couldn't do unless there were the backup earnings and capital employed in the other entities. There's enormous advantages in capital deployment within the place. So there is not a big discount to break up value embodied in Berkshire's price." Greg Abel reinforced the idea, saying it's "the value driver of the unique structure of Berkshire and it creates immense value."
COVID-19 Impact to Berkshire
- Current business operations: Berkshire itself will definitely have lower operating earnings than had the virus never shut the economy down. It hurts some businesses a lot, others very little. The 3 largest businesses - Insurance, BNSF Railroad and Energy are in a decent position. Overall Berkshire has a huge cash position and is a fundamental part of how they do business, they are an insurer after all and see themselves as stewards of other's capital. Sees Candy, Furniture Mart, restaurant related businesses and retail are struggling and might not survive. Precision Castparts will see lowered demand in aerospace just like everyone else but they should be fine.
- Would Berkshire considering using its huge cash position to help out operating companies that might be severely affected by the virus, or to allow them to grow in market share as competitors contract? They've sent some money to a few, but they won't waste money on anything they think will be in worse position than it is today, that is precisely why they decided to unload their airline positions at heavy losses, the capital was permanently impaired. Their job isn't to subsidize businesses with shareholder funds, they will advance money and they have. They have too much cash, but they will always be a Fort Knox, just in case.
- With all the current investments in capital intensive businesses does he fear an inflationary environment as potential value destroyer. He acknowledges capital intensive businesses "just aren't as good." If you have operations that don't require capital to grow they can return enormous sums, and can be then redeployed within Berkshire to other areas. Energy requires more capital as it grows, BNSF Railroads to some extent requires more capital even if it doesn't grow. " For example just look at the top 4 or 5 companies by market cap in the US and none of them are capital intensive. The insurance side also requires no capital, but it does require having capital available, but they then take that and invest in things they want to own. The railroad is very capital intensive but he bought it with a 100yr time horizon and it will do great in inflationary periods.
- Current cash balance: As of March 31, 2020 they had approximately $125 billion in cash and treasuries, and around $180 billion in marketable equities (doesn't count all the fully owned businesses). And some people think the cash position is too high, but the whole point is to have it when things like this happen that might be completely unforeseen but not out of the realm of possibility and that is what a great manager does.
- Insurance update - Geico gave back $2.5 billion back to policyholders in the form of premium credits, driving will be down and he expects things to be relatively tame. Does Berkshire plan on underwriting pandemic policies in the future? If the price is right, Berkshire will ensure just about anything so probably.
- Operating earnings in the first quarter were nearly $6 billion, but they did sell approximately net $6 billion in securities in April. "That isn't because we though the stock market was going to go down or anything of this order, because somebody changes their target price or they change this year's earnings forecast. I just decided I'd made a mistake in evaluation, that was an understandable mistake... when investing in the airlines business."
Portfolio Management & Mistakes in Oil & Airlines
- Sold their entire stake in US airlines (Delta, American, Southwest, United) of which they owned around 10% of each. They would have owned more but those were just the 4 that they could make asizable investment in. Thought they were getting $1 billion of earnings for a $7-8 billion investment over a period of time, and it was nothing that the CEOs did but they operate in a tough business in the best of times. Airline industry appears to have changed in a very major way, considering the lack oftravelers and that they are all looking to take on $10 billion or so in loans that will come out of future earnings. Right now he can't say with any certainty that in 3 years people will fly just as much as they did in 2019, plus the fact that they have all these airplanes that they've ordered and now don't need. The fact that he sold says he thinks they are permanently impaired, not just temporarily affected.
- Regarding portfolio sales in general, they almost always sell the entire stake, they don't trim positions. If they like a business they're going to buy as much as they can and keep as long as they can. And when they change their mind they sell it all, there are no half measures.
- Did Berkshire make any purchases during March dip? Ted Weschler and Todd Combs likely made some buys but he doesn't recall buying anything and they didn't get any particularly compelling offers from companies they were interested in, but the Fed moving quickly freed up a lot of liquidity for everyone which is why it was much different than 2008/2009.
- On Occidental stake, and oil in general? With any oil company, "how it works out depends on the price of oil to a great extent." No idea what they will do in the future, but said "oil production is going to go down a lot in the next few years because it does not pay to drill." So for any other Occidental shareholder or owner of any oil producer "you join me in having made a mistake so far in terms of where oil prices went and who knows where they go in the future."
- Is there risk of permanent loss of capital in the oil equity investments? Absolutely, if oil stays at these prices it will flow over into the banking industry that owns all their debt. Producers have to take their chances on future prices unless you sell a lot of futures forward. But if these prices prevail, there will be a lot of bad loans in the energy sector, which leads to restructuring and potentially wiping out equity holders.
- Thoughts on buybacks and the recent backlash about them in light of bailouts? Generally it is nothing more than a simple way to distribute cash to shareholders as opposed to dividends that get paid to everyone whether they want them or not. He does have a problem with buybacks irrespective of price, you should only be buying back when it is in the interest of the shareholder to do so. Greg Abel - They're supportive of buybacks, but some companies financial engineering was extreme and too cute where they effectively used every ounce of the balance sheet to buy back stock at a time when they had no cushion for the business in good times let alone unforeseen events. Warren on companies that do that "it really is stupid, but I don't think it's immoral."
- Why didn't Berkshire scoop up Berkshire shares in mid March when they were trading 30% below what they had just paid in Jan/Feb? "it was a very, very, very short period where they were 30% less, but I don't think Berkshire shares relative to present value are at a significantly different discount than they were when we were paying somewhat higher prices. I mean it's like what Keynes said 'when the facts change, I change my mind. What do you do sir?' (Pretty incredible statement, either shares were simply 30% overvalued or he believes the companies took a 30% hit for undetermined amount of time? "There could be a price relative to value at the time... the value of certain things have decreased. Our airline position was a mistake, Berkshire is worth less today because I took that position than if I hadn't... but the price has not gotten to a level where it really feels way better to us than other things, including the option value of money to step up in a big, big way."