Have you ever wondered what it is truly like to attend a Berkshire Hathaway meeting?
Imagine you are traveling to a super bowl event. There is excitement, anticipation and hoopla with plenty of trinkets to buy. There are parties and gatherings and the fun of being around like minded people. But, like the Super Bowl, people come for the main event; the chance to hear in person, the wisdom of two unique men who epitomize the essence of the good that can come from well-executed capitalism.
Theirs is a philosophy that harkens back to the early America of the 18th and 19th century. It is like being in the presence of Ben Franklin and hearing him propose in a well-constructed, humorous and folksy way, how to live your most effective life. There is no hint of preaching or bullying, just some common sense wisdom which always feels right-on. (At least to me). When we hear it we come away feeling there is a way of getting things right in spite of the swirling chaos that surrounds us.
You also feel in your gut that the core of the philosophy is based on truth and integrity. The acknowledgement that there will be mistakes and promises to get it right the next time. The philosophy acknowledges that while the future is uncertain, we should take care of the things we can control. In Buffett’s own words; “We just keep swimming and let the tide take care of itself”. This is an example of the folksy wisdom I’m talking about.
However as you listen to this you may be thinking; why should I care anything about Warren Buffett or Charlie Munger or anything they say? And why, you may wonder, do I continue to articulate the important lessons over and over, as I learn them and re-learn them? The reason is simple. Much of what I have learned helps me in my own life and helps me to help others.
Take the concept of inner scorecard vs. outer scorecard
Warren says: “If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor (substitute your own word, singer, artist, accountant, lawyer) but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?” In other words, which is most important..your knowing your worth regardless of what others say, or building a fake facade so others think your great while you know you have failed?
In business as well in life we often have to make the kind of decisions that could benefit us in the short-term but may lead to a loss of reputation and integrity in the future. Keeping your inner scorecard on track means continuously telling yourself and the world around you the truth.
“I will tell you how to become rich, says Buffett. Close the doors and be fearful when others are greedy. Be greedy when others are fearful.”
Here’s another: ….and I know you’ve heard this one.
“I will tell you how to become rich,” says Buffett. “Close the doors and be fearful when others are greedy. Be greedy when others are fearful.” Rudyard Kipling said it too: “Keep your head when all about you are losing theirs.” This can make you rich but it can also smooth out at chaotic life as well.
So now to the meeting. I traveled to Omaha on Wednesday to attend some conferences and dinners all in anticipation of the Saturday Shareholder Meeting. As always, I arrived at a secret location at 5:30 am Saturday morning. Sorry, I just can’t tell you. The doors open at 7am and thus begins a mad dash to get the closest seats. This is the Centurylink center in downtown Omaha, and while I don’t know the official capacity, it has to be in the 10’s of thousands. The meeting actually starts at 8:30 so there is some time waiting around for things to start. Slowly some VIPs enter their section on the floor in front of the stage. I see Bill Gates, Charlie Rose, Warren’s son, Howard and some journalists take their seats next to the stage. One of my favorites, Becky Quick is there from CNBC and Carol Loomis a very well regarded journalist previously from Fortune Magazine takes her seat as well.
Before Warren and Charlie come out there is a movie and then the meeting begins. Hi, I’m Warren,” he says. “This is Charlie. He can hear, I can see. We work together”, which gets a laugh and so they begin.
Buffett starts by going over the first quarter’s earnings report which is clean and easy to understand on the slide. Very simple, nothing particularly noteworthy except a noticeable improvement in earnings from the Railroad holding, BNSF.
The questions begin.
Now I’m not going to speak about every question in the 6 hour session, but I’ve chosen a few which stood out in my mind.
A couple of tough questions are read by Carol Loomis. Buffett is challenged to explain a negative article about Clayton Homes, a wholly owned Berkshire company, which makes and installs manufactured housing. The article states that Clayton is making a huge profit on the sale and financing of these homes, taking advantage of the home buyer and forcing many of them to default. In other words, it’s all about questionable and unethical practices. Buffett points out that the article miscalculated the profit which is 3% not the 20% mentioned and that unlike many other lenders, Clayton holds these mortgages, so they are hurt by defaults along with the customer. So anything which hurts’ the customer hurts them too. Also these customers are generally poor and most lenders won’t even loan them the money to buy these inexpensive houses.
Then it’s a shareholder’s turn to ask a question. He wants to know the 5 most important characteristics in deciding which company to buy.
Mr. Munger responds, saying Berkshire doesn’t’t have a one-size-fits-all checklist for buying businesses and neither do they have a formula, but they try to learn from the past.
Warren asks himself: Do they really want to be a partner with this company and count on them to behave well in the future? A lot of deals don’t make it past this question.
By the way, there has to be dozens of books promising to teach you the Warren Buffett Way of picking stocks, and all of them include checklists. Maybe they’re good for mortals, but Buffett and Munger don’t use them.
A question about IBM is asked next. Paraphrasing it amounts to: Is IBM on a permanent downward trend while other companies are eating into its business and profit? Munger says no. While recently IBM’s computer division has been a “mixed bag”, IBM is an enormous company and they paid a good price.
Warren chimes in that he doesn’t like to “talk up his book” which means he is really not looking for the stock to go up now while he is accumulating shares. He wants to buy them as cheaply as possible plus he knows the company is buying back shares too so he wants them to buy their shares as low as possible too.
“If we talked our book, we would say pessimistic things about all four of the biggest holdings we have because all four are repurchasing their shares at the moment”.
He asks Munger why people expect the opposite. Munger replied dryly: “If people weren’t often so wrong, we wouldn’t’t be so rich.”
There’s a good lesson for us all, especially younger people.
While you are accumulating savings in your 401k or elsewhere, do not wish for a great bull market. Instead wish for a raging bear so you can buy more shares with the same monthly contribution. You will be richer in the years ahead when you actually will need the money.
One of my favorite questions came from shareholder who questioned the wisdom of investing in companies that use so much sugar, considering the news reports of the unhealthful effects of high sugar consumption. Coca Cola and Dairy Queen are examples. With the negative health effects of high sugar consumption and changing consumer habits, the shareholder questioned whether these companies would be able to continue to dominate their industries.
Buffett acknowledged that the trends she described are happening, but he thinks all food and beverage companies will adjust to the expressed preferences of the consumers. “No company ever does well ignoring its consumer,” Twenty years from now, Mr. Buffett predicts there will be more Coke cases consumed than today by some margin.
Mr. Buffett jokes that one-quarter of all the calories he consumes come from Coca-Cola type food. The capper is this quote: There’s a lot to be said about being happy what you’re doing. ”If I lived my whole life eating broccoli and brussell sprouts, I probably wouldn’t live as long.”
He subtly picks up the box of See’s candy on the table in front of him and passes it to Munger. The crowd laughs. “Eating broccoli,” he says, is “like going to jail.”
It’s a pretty good bet that an awful lot of people are going to like the same thing, says Mr. Buffet. “I don’t see smiles on the faces of people at Whole Foods, so I like the brands we’re buying.”
Another question addresses a big debate within the investment community. Whether, based on one of Buffett’s favorite data points, the market is significantly overvalued.
Without getting into all the details, while he thinks it is high, it’s all relative to the level of interest rates.
So taking into account current interest rates, it not that bad.
Mr. Buffett doesn’t seem worried, but he says the level of interest rates going forward is what will shape his view on how attractive stocks are. “If we continue with these interest rates, stocks will look very cheap,” he says.
This is another important lesson. The price of things is determined by the cost of money. How much house could you buy when the cost of money is 10% versus 5%? The monthly payment on a $250,000 mortgage at 10% would be essentially the same as a $400,000 mortgage at 5%. So you can see that the lower cost of money raised the value.
Stocks are no different. Companies can pay more to buy other companies if the cost of financing is low. This values everything higher.
For now, since the degree to which interest rates will eventually rise and the timing of that rise is unknown, stocks, for the moment are priced about right.
There’s a lot more to talk about but stay tuned for my interview with Becky Quick from CNBC. She was pretty busy following him around and reporting. Check it out here. She has a lot to tell us.