Travelling to the Annual General Meeting of Berkshire Hathaway to hear Warren Buffett and Charlie Munger talk about their outlook on investment, the world and life in general is probably one of the most rewarding and exciting trips any value investor could make.

How much longer Munger at 92 and Buffett at 86 years can keep going is anyone’s guess but there is certainly life in the grand old men of investment showing no difficulty in answering questions for over five hours in total. If the numbers attending (40,000 plus) demonstrated anything it is that as long as they keep going, the crowds will keep coming to hear two of the most incredible investment minds of our time.

Here are the five things I took away:

  1. Honesty and Integrity are the cornerstone of sound investment management.
  2. Cash is king but most investors struggle to have the patience to hold it for investment opportunities – the Sage of Omaha has no such difficulty.
  3. Even the greatest of Investors are still learning.
  4. Artificial Intelligence and the speed of the technological revolution is likely to create as many issues as opportunities in the next twenty years.
  5. When the rest of the world is fearful we know everything will be just fine.

 

  1. Honest and Integrity are the cornerstone of sound investment management.

In contrast to the vast majority of the financial industry Berkshire’s mantra stands as a bastion for honesty and integrity in a fickle industry blown by the winds of self interest and maximum profit. It is profoundly revealing that Buffett’s question to every public company CEO is “What would you do differently if you owned the entire company yourself”.

This owners eye with a reminder that CEOs should be working in the best interest of shareholders is something welcomed by those understanding that true value is not produced in a quarter but by long term wise strategic decisions. The alter of ‘Quarterly Earnings’ is not frequented by the worshippers of Buffett and Munger with a welcome reminder that short term profits (despite their advancing years) need to be overlooked in the pursuit of long term objectives.

Citing the example of GEICO writing more insurance business and creating higher costs near term while others are pulling back to protect margins, Buffett is content with the slogan ‘no long term gain without short term pain’. His threshold for suffering is enhanced by the willingness of his investors to stay the course, after all, results have proved more than satisfactory!

Blasting the hedge funds industry with two barrels:

On several occasions Munger chastised the industry on costs and in particular derided hedge fund mangers for excessive fees unjustifiably reducing investor returns. It was notably that for an active investor Buffett had praise for Jack Bogle the founder to Vanguard asking him to stand to rounds of applause stating “this man has put tens of billions back into the pockets of American investors”.

What other investment manager would point people in the direction of another investment solution other than their own? Buffett wasn’t saying that active management is dead but that the evidence shows many investors are better off just buying into an index like the S&P500 and staying the course.  The financial industry will always be full of people promoting products that offer the chance to get rich quick via complex structures at exorbitant fees but in contrast this is not Berkshire Hathaway.

There is a simplicity and honesty in this investment philosophy and Ben Graham the father of Value Investing would no doubt approve of his most famous of disciples. To say the process is simple is true, yet it is anything but easy to emulate.

With reckless abandon gnashing on peanut brittle Munger draws a breath “I’d argue that what we are trying to do is set a proper example”. To raptures applause: “A lot of people are trying to be brilliant and we are just trying to stay rational”.

 

  1. Cash is king but most investors struggle to have the patience to hold it for investment opportunities – the Sage of Omaha has no such difficulty.

It is striking that as the S&P500 sits near an all-time high, Berkshire Hathaway is amounting a war chest of cash again ready to invest. Market corrections are notoriously difficult to predict but Buffett is ready to take advantage when the inevitable finally arrives. He states: “There is no way I can come back to you in three years with $150 billion in cash and tell you I am doing something brilliant”.

It is obvious that cash earns little to nothing in the present environment with interest rates at record lows, in fact after inflation it’s clearly loosing value – but the patient batter is waiting for the perfect pitch within the realms of his circle of competence. Others swing at each ball if you want too, but this game is about striking cleanly at the opportune moment.

Just because Mr Market comes back with prices every day does not mean you have to trade. When everyone is making money it’s hard to remain patient and wait. Human nature dictates that it’s almost irresistible to see others making money and not want to get involved, but here comes one of the most important lessons: the greatest opportunities only exist after periods of prolonged loss.

Capital is less safe when the Market sits at a high level and investors feel supremely confident about returns. In contrast stocks in general are less risky when they trade at lower valuations providing a greater margin of safety.

Who knows where the Market will be in six weeks or six months “Charlie and I don’t really think about sectors or Macros we look at investment based on return on capital” Warren Buffett.

 

  1. Even the greatest of Investors are still learning.

After announcing the sale of a third of Berkshire’s six year Investment in IBM early this year (breaking even) the pair took questions on the company’s decision to invest in Apple.

Munger quipped friendly to Warren “It’s a very good thing you [Warren] bought Apple. It shows one of two things either you have gone mad or you are learning something. I prefer the learning explanation”.

With characteristic humility Buffett began “I was wrong on the first one and we will find out if I am wrong on the second. I don’t count them as apples and apples and it’s not quite apples and oranges. It’s something in between”.

Buffett regards Apple as more of a consumer products company than a tech business but it’s an interesting change of heart.

There was honest confession over never investing in Amazon and high praise for Jeff Bezos its CEO. “We underestimated the brilliance of his [Jeff Bezos] execution but Amazon always looked expensive”. And again with Google admitting that on reflection he should have bought Google shortly after it went public more than a decade ago.  “I think we were smart enough to do it, and we didn’t do it . . . You have almost never seen a business like it” Munger commented “One of our biggest mistakes was we figured out Google’s great model early on and we never did anything about buying it”.

In a world were mistakes are swiftly overlooked it was remarkable self assured reflection at the age of 92 that Charlie Munger was happy to say “we are still learning” and so it should be for all of us.

  1. Artificial Intelligence and the speed of the technological revolution is likely to create as many issues as opportunities in the next twenty years.

“The world has evolved and its going to keep evolving but at a much greater speed” were Buffett’s comments on department stores and the move to online shopping.

Answering a question on Artificial Intelligence (AI) and automated vehicles Buffett commented “driverless trucks are a lot more of a threat than an opportunity with regards to the auto insurance industry’.  Note Berkshire owns significant stakes in the auto insurance industry with GEICO.

Just as the industrial revolution created gigantic social and economic change, the advancement of technology stands to fundamentally change the workplace and life as we know it in the next twenty years.  Yet what remains as a cornerstone of Berkshire thought is seeking businesses with competitive advantage and an economic moat. “It’s just amazing how the world would react to double the productivity”.  Clearly while there will be winners and losers in this evolution of technology standing in its way was quipped to be like telling a man with a shovel digging too fast to use a spoon!

 

  1. When the rest of the world is fearful we know everything will be just fine.

Hearing two of the most experienced investors puts pay to the notion that as we get older it’s inevitable that we pine for the past at the expense of believing in a brighter and more prosperous future.  With all of the challenges of an uncertain world it’s refreshing to hear positivity “When the rest of the world is fearful we know that America will be just fine”. The notion of wanting to be a dub optimist rather than a smart pessimist has served Berkshire investors extremely well over the years. Despite all of the Markets ups and downs wealth creation as part of a percentage of GDP has been remarkable over the long term.

There is a firm belief that wealth will continue to grow and wise investors in great businesses will be the beneficiaries of that exponential return.

Munger commented “If adversity comes we are likely to do better in the end”. It has been a lesson of a long history that performance has come as a result of discipled and focussed investment in durable businesses with competitive advantage. Temperament has also played a very significant role. While others have been ‘fearful’ Berkshire Hathaway and Warren Buffett have been ‘greedy’ taking advantage of misplaced securities and the madness of crowds selling assets below their intrinsic value.

No one knows when the next market correction will begin but what is certain is that investors like Warren Buffett will interpret any significant downturn in economic fortunes as an opportunity to put cash to work in the belief that the global economy and America in particular will be just fine long term.

 

The information in this document is based on the 2017 AGM of Berkshire Hathaway held on Saturday 6th May 2017 in Omaha.  The information contained in this document is provided for information purposes only.  It does not constitute a research recommendation or investment advice and must not be treated as a recommendation or an offer or solicitation for investment. Investors should form their own view in relation to any of the investments mentioned.  With investing your capital is at risk.

 

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