#1 Business - Berkshire Hathaway AGM Review
May 4, 2021
Well, the greatest show in town for capitalists passed through this weekend but without the 40,000 investor “tragics” who travel to Omaha, Nebraska to listen to the Oracle of Omaha, Warren Buffett and his faithful business partner Vice Chairman, Charlie Munger. This was the second time we relied on Yahoo Finance to deliver the “Woodstock for capitalists” meeting and Becky Quick of CNBC relayed investor questions for these titans of industry to answer.
Technology fills the role of transmission well but you miss the investors and expert managers reports, the exhibition hall full of iconic Berkshire businesses and the socialization with like minded business people. So Warren Buffett and Charlie Munger were beamed into our living rooms and in my case in Sydney, Australia at 3.30am on Sunday morning. That is also 12.30pm in Los Angeles on Saturday where it was being held live when I tuned in.
I was well armed with peanut brittle and Coca Cola to watch the oldest business partnership (62 years) talk investing. I was not disappointed as both Warren Buffett and Charlie had their Coke and Sees’ Peanut Brittle on display and easily accessible. For those of you that don’t know, when I have attended past annual meetings in Omaha with my usual travelling companions; all expert equity investors and managers we are no match for Charlie Munger’s hunger for peanut brittle. We once tried to match him piece for piece from our outstandingly positioned seats in row 6. However, we failed dismally and early. Why Sees’ Peanut Brittle and Coco Cola? Because Berkshire owns all of Sees and 9.3% of Coca Cola and they shamelessly promote them. Why Warren Buffett and Charlie Munger? Because these two live for reporting the progress of their business Berkshire Hathaway to their fellow investors and would-be investors. Wherever they go the flock of investor disciples follows.
This dynamic duo aged 90 and 97 respectively are possibly the greatest and most successful salesmen in the world of investing. Age does not weary them because according to them they are ageing proportionately at a slower pace now than a 25 year old would today. Only an actuary could make that argument funny and it was hilarious. Why do I call them salesmen? Because they have an answer for everything, and they have the magic potion. In their potion they own more than everyone else which is their “skin in the game”. If they make a mistake, they can respond to investor concerns by adding – If you are worried then think about us, we lost even more than you. And mistakes, well they simply own up take it on the chin and move on like the juggernaut conglomerate of businesses that they have become.
Is there a greater show in North America, not really? They claim that no other business owns as much plant, property and infrastructure in USA than Berkshire Hathaway. Berkshire is now officially the tenth (10th) largest company in the world by market value which is $578 billion today. The largest company in the world is Apple at $2 trillion and BH owns 5.4% of it. When asked why did Berkshire sell some of its shareholding in Apple ($11 billion worth) which cost $36 billion to acquire in 2016, produces $775m pa in dividends and is now worth over $100 billion Buffett conceded that this was a mistake which Munger reinforced. Mistakes at Berkshire are part of the joy of investing because not always is investing an easy game to play. Berkshire’s recent forays into aviation and it’s continued acquisitions of some banks have been errors which have cost $15 billion but experienced investors know that you don’t sweat mistakes you learn and move on. On balance the upside gains easily cover the errors.
One of the keys to Berkshire’s fascination is its surplus cash, a war chest any country would be proud of. It’s still at a staggering $145.4 billion and that’s after $24.7 billion has been used to buy back 80,998 A class shares. These shares are now worth US $412,500 or AUD $530,000 each at the end of April 2021.
The results for the after-tax earnings for the March quarter were amazing, particularly when you add all the 00000’s to the numbers. The insurance business produced $1.972 billion, the railroad business $1.954 billion, other businesses $2.619 billion and other $0.473 billion. Total operating earnings were $7.018 billion and investment and derivative gains added a further $4.693 billion totaling $11.711 billion. For the 2020 year Berkshire earned $42.5 billion. Since 1965 Berkshire has produced a compound annual gain of 20%, according to the annual report.
Buffett says that 85% of the US economy is in top gear and racing so they see the economy in great shape, they thanked the speed of the Federal Reserve’s response on 26th March 2020 to delivering confidence. They saw the global pandemic as a hurdle which no one was responsible for and they appreciate the management and turnaround which the US has seen. I think this is important as last year Buffett strongly sold America’s potential. He repeated several times “Don’t bet against America!” They see the $1,400 cheques to 85% of the nation’s citizens as continuing to stimulate the economy, particularly when they themselves believe that 40% of the population could not find $400 if summoned. Capitalism in the USA has been good to capitalists. All this said they know, as economists that printing money will have consequences but in a zero-interest rate environment it is only having a positive impact for now. They admit to enjoying watching this unpredictable moment in time and seeing it pan out better than they envisaged.
Buffett’s lessons of business were in history and he took a look back to 1989 at the world’s biggest businesses. In that year, Industrial Bank of Japan was the world’s largest business valued at $104 billion. Another 12 Japanese businesses including Toyota and many of their banks made up 13 spots in the top 20. The USA had six companies. In the lowest spot was the USA’s Merck & Co at $30 billion. Today that same spot is 10 times that value at $300 billion and now the US has 13 companies in the top 20 with five (Apple, Microsoft, Amazon, Alphabet and Facebook) taking out top six spots. This was Buffett’s way of showing that his message about backing the US last year was correct. Interestingly, and because of Berkshire’s sizeable shareholding in Apple and realized gains in that company’s share sales, he now understands the technology value which for many years he resisted. Today he likens this trend to that of the automobile industry through the 1900’s. Technology dominates the top 20 spots. Interestingly none of the top 20 in 1989 are in the top 20 today which shows how it is hard to predict which business today will be here tomorrow. The message is clear: investing is an active skill although, Buffett is the first to impress that for a novice or someone who is not interested, that investing in the S&P index is an excellent alternative. He adds that it is important to consider fees and he advocates for Vanguard’s low fee model for this reason.
It seems that Warren Buffett and Charlie Munger are unstoppable. Death will change things and then their loyal managers, Greg Abel and Ajit Jain look likely to chart a similar course. Until then and next year’s AM on April 30th, small investors can take heart from the performance, transparency and the fact that large investors are not prioritized over small ones as is Berkshire’s mantra where every investor is valued.