I just recently returned from Omaha and the Berkshire Hathaway (BRK-A) Annual Meeting, and as a person that has attended several of these meetings, this one was different on several fronts, in my opinion.
Mood
To begin, the mood of shareholders at the meeting was a bit more somber given what has occurred in the markets and world over the last year. To be sure, some folks have been shell-shocked from what has happened, and they were likely looking to Chairman Warren Buffett, and his partner, Charlie Munger for guidance on how to navigate today’s choppy waters. And by and large Buffett and Munger were very optimistic on the long-term future of the US economy and the opportunity of our economic system to create an even better economic future. What’s more, Buffett also seemed to indicate that there are huge opportunities in the world today, and he hopes to take advantage of a few of them for Berkshire. That said, they also said to not to expect any quick recoveries, and this is significant given the wide ranging number of businesses that Berkshire owns, and as such, the amount of “economic data” Buffett sees from Berkshire’s subsidiaries.
New Q&A Structure
Second, this year’s meeting featured a new question and answer session, where shareholders emailed questions ahead of time to a trio of journalists who selected questions for Buffett and Munger. This was alternated with the usual questions at the microphone from members of the audience. Overwhelmingly, the questions were much better and more germane to Berkshire than they have been in years past. For example, Buffett received several poignant questions about Berkshire’s holdings of Washington Post (WPO), Moodys (MCO), Wells Fargo (WFC), and some of its other private businesses.
Comments on Holdings
On Post, Buffett said that despite the newspaper business essentially dying, Berkshire intends to hold its Post stake. He was somewhat positive on Post’s cable TV and educational (Kaplan) business, but didn’t seem to think this would offset the decline of the newspaper business. As for Moodys, he said they had also drank the kool aid of ever rising home prices, which, in my opinion, has dramatically hurt the credibility of their business. Buffett did say, however, that he thinks it still is a good business, despite both he and Munger’s comments, indicated that neither use ratings when evaluating securities. With Wells Fargo, both Buffett and Munger defended Wells’ businesses model and said it was one of the strongest banks in the industry. This is significant, because it is one of Berkshire’s largest holdings, and through their comments Buffett and Munger were essentially defending their position in the stock, especially considering the government’s “bank stress tests” are due out sometime soon. It is noteworthy, though, that they remained somewhat silent about another large holding, American Express (AXP).
As for Berkshire’s private businesses, Buffett spoke in depth about auto-insurer Geico, and his belief that as a low-cost leader in the industry, Geico has several advantages, and that he expects it to grow even more. In fact, Geico has been one of the few of Berkshire’s subsidiaries that has been growing, as consumers seek to reduce their auto insurance costs. He also spoke favorably about Berkshire’s utility businesses, and indicated that he expects Berkshire to do more in this field. The majority of Berkshire’s other businesses, though are experiencing significant weaknesses in the current economic state, which isn’t surprising given that many are tied directly to the consumer. On balance, I’d postulate that some of the questions, were, in fact, better than the answers that were given, which is a marked contrast from prior years, and what I think is an endorsement of the current Q&A model, as it has appeared to more deeply engage Berkshire’s shareholders.
Expectations For Berkshire
For Berkshire, both Buffett and Munger said that the days of 20% growth in the firm are long gone, primarily due to Berkshire’s massive size. They now target growth for the firm of a few percentage points better than the S&P, on average, each year. Buffett also indicated that Berkshire’s most enduring competitive advantages are its culture, business model, and shareholder base. This is very important, as culture is one of the most important characteristics of any business, yet the hardest to value and quantify. Buffett also indicated that his succession plan for an eventual CEO and one, or more, CIO’s hasn’t changed. They didn’t explicitly address succession at the subsidiary level during the meeting.
Market Commentary
Buffett said that the 1974 period was the best for buying stocks. He said that valuations weren’t as cheap then, but interest rates were also much higher then. He also said that the country was in much better shape then, than it is now. Munger further commented that if stocks decline by 40% on average, they are closer to an attractive price than they have been before.
Both Munger and Buffett also warned that targeting inflation can be a slippery slope and that dollars will most likely purchase less in 10 years than they purchase today. What is more, Buffett also rightly pointed out that it is China—and not the US taxpayer—that is essentially funding the bulk of the current government debt, and Munger was very complimentary of what China has done economically, and also advocated that the US and China should be very friendly because they are joined at the hip.
Earnings
In the afternoon, Buffett gave a brief preview of Berkshire’s first quarter earnings, and indicated that book value was down around 6%. He indicated that Geico and the utilities businesses have done well, while most others have seen weakness in their businesses. Check back at the end of this week, for my analysis of Berkshire’s first quarter earnings, which are due to be released on Friday.
You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have linked here, a Marketwatch article, which I have linked here, and a Bloomberg video, which I have linked here.
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Justin
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