Last weekend I drove east 550 miles, taking me through oil country, followed by cow country, followed by corn country. Then I suddenly arrived at the epicenter of the investing universe (at least for the weekend) – Omaha, Nebraska. The fabled Berkshire Hathaway annual shareholder meeting – a weekend gathering of finance pros, BRK shareholders, and Buffett and Munger fanatics.
Saturday was the main jam, with a way-overcapacity crowd of 25,000 packing the Centurylink Arena to listen to Warren Buffet and Charlie Munger hold forth for over 7 hours. The 87- and 94-year old took the stage at 10am and held my rapt attention until 5pm. No visual aids. Their humor, humility and knowledge made it easy to listen, and their long-term success reminds you that it is worth listening.
Here are some of the themes and takeaways from Warren’s (Buffett) and Charlie’s (Munger) presentation and Q&A. Some of the things, most of the things, are not new ideas. And that jives with Warren and Charlie’s style – “this is not a complicated business. It is a disciplined business.” The ideas are out there. It is discipline and consistent implementation that matter most.
Capital allocation. As an investor, you have a certain amount of capital. You want to allocate it wisely. You want to buy things that have a high expected return and a low expected risk of losing all or a portion your investment. This is obvious enough. Buffett and Munger stress taking this to the next level – the companies (stocks) you invest in must also be masters of capital allocation.
A company can allocate its money in several ways. Here are some of the ‘buckets’:
Size. Investment firms are limited by size, especially if they specialize (which they should). Attractive opportunities, in a given subset of the investment universe, are limited. There are only so many relatively high return, relatively low risk opportunities, and each of these opportunities can only receive a limited amount of capital. A $100 million dollar investment firm can put to work a significant percentage of their capital in almost any investment opportunity. The same cannot be said about a $10 billion dollar investment firm. As an investment firm grows, it will likely need to diversify into additional investment types, or it will need to accept lower future expected returns. Berkshire is largely an investment firm, and Warren and Charlie both make clear statements that their current size ($480B market cap) will make it impossible for them to deliver future returns as large as historical returns. A company can expand operations and an investment firm can expand investment types, but eventually they lose specialization and become the same as the overall market. Firms and funds like Berkshire and Fidelity Contrafund, companies like Apple and Microsoft – they will likely continue to deliver solid growth and solid returns, but, due to their size, it will be impossible for them to match their historical return and growth rates. This gives small firms an opportunity to outperform, since they can allocate significant percentages of their capital to attractive but small-sized opportunities.
Bonds. Long term bonds, at current yields, are a very bad investment. Enough said.
Productive and Non-Productive Assets. Some assets are associated with an income stream – stocks, bonds, commercial real estate, etc. These are productive assets. Then there are non-productive assets, such as gold and other commodities, owner-occupied real estate, currencies, and crypto-currencies. Buying a non-productive asset is pure speculation. You buy it with the hope that somebody else will buy it in the future for a higher price, because they think they will be able to sell it later in the future for an even higher price. “These sort of things rely on more people coming than going. They can last a while. But eventually they end badly.”
Conservative balance sheet. Berkshire has always held a conservative balance sheet (they currently hold approximately $100B in cash equivalents). In 2008 and 2009 they were one of relatively few places left with a strong capital position. Berkshire’s consistently prudent risk management (which sometimes leads to lower returns for long periods) allowed them to take advantage of unprecedented good deals during the distress and in the aftermath of the financial crisis. The conservative risk management and subsequent good deals have led to remarkable Berkshire returns from 2009 through today – over 200% (i.e. it tripled). Stay conservative. You want to be ready with plenty of risk capital when remarkable opportunities are presented.
US Bullishness. Warren Buffett is well-known for his positive outlook on the United State’s future. He says he has seen 14 presidents in his lifetime. 7 democrat, 7 republican. He has seen the Cuban Missile Crisis, the Financial Crisis, Vietnam and so much more. Fear of ‘it coming apart’ has occurred with each of these presidents and each of these eras. But it has turned out good and fine, again and again. “This country just works. Everybody in this room is living better than John D Rockefeller could have lived. I would love to be born into the United States today.”
Treat people right. Berkshire has over 500,000 employees. Probably tens-of-thousands of upper management, a thousand executive officers. Yet there were only a few hundred reserved seats at the Shareholder meeting. Maybe 400 seats. That’s enough for the director of every company (as in, the CEO of companies like Geico and Kraft-Heinz), plus maybe 1 or 2 others from the company. That’s it. Everybody else is the same. From the lowliest holder of 1 class-b share to the holder of 1,000 class-A shares, everybody is the same. Fancy hedge fund manager from Wall Street? Cramer from CNBC? Bloomberg analyst? You’re the same as everybody else. Get yourself a seat, you get the same information, at the same time, in the same format, as everybody else.
Buffet wrote in his most recent letter to shareholders that he imagines writing the letter to the shareholder of the most humble means. A shareholder with 1 share is a partner, just like all the other shareholders. Less votes, yes, but a partner nonetheless. The wealthiest man in the world, and most influential and successful investor of all time, acts and thinks as if all of his shareholders are partners entitled to equal treatment. Let’s all take that one to heart in our own endeavors.
Warren Buffett is Admiral Ackbar? Listen to Buffet for a few seconds. Pretty sure he is Admiral Ackbar.
I ran a 5K, too. The day after the shareholder meeting, Sunday, 2500 of us gathered for the 6th annual Invest in Yourself 5K. I ran 16:52 (5:25/mile). Dang right.
More to come on that. I’m racing again next weekend in the Longmont Summer Open Sprint Triathlon, and I’ll write another post that includes both of the races.