Nicknamed the “Woodstock for Capitalists,” this year’s annual Berkshire Hathaway Annual Meeting drew 42,000 attendees from all 50 states and several countries.
The two stars of the show were Warren Buffett—the 87-year-old investment “Wizard of Omaha” —and 94-year-old master investor Charlie Munger, who has been Buffet’s co-pilot since about 1975. The pair’s zest for American business combined with their one-line zingers and jewels of investment wisdom made for a meeting that was both informative, inspirational and, at times, hilarious.
Throughout the five hours of Q&A, where journalists and audience members peppered Buffet and Munger with tough questions, four main themes surfaced.
Theme #1: Investing Principles
Patience – Buffet started off the day with a story about the first stock he bought at age 11 in 1942: Cities Service, an oil service company. At the time, the world was in the throes of an unprecedented world war and America had joined forces.
Buffet carefully researched and then purchased six stock shares at $38 a share for himself and his sister. Immediately, he saw it decline 30%. While his sister urged him to get out, he patiently waited to sell it once it recovered a few months later at $40 a share. He then had the unpleasant experience of watching the stock rise to $200 a share without him.
From this experience, he learned a valuable lesson that has become a tenet of his investing philosophy: buy good companies with competitive advantages and strong intrinsic value, hold them forever, and don’t watch the markets too closely.
Wide Moats – Emphasized repeatedly throughout the meeting was the importance of buying good businesses, at a great price, with wide moats. A wide moat means competitors have a long distance to swim across alligator-infested waters in order to overcome a company’s competitive advantage, such as its robust brand strength, product stickiness or low-cost production methods.
At one point, Buffett was asked about Elon Musk’s recent comments criticizing his “moat” economic principle. In response to the Tesla Motors CEO’s opinion that “moats are lame” because they can be squashed by innovation, Buffett asserted that competitive advantage moats should be defended. He added that he doesn’t believe Musk will take them on in candy (since Berkshire’s See’s Candy enjoys an especially wide moat with its brand power).
Munger said, “Elon says a conventional moat is quaint, and that's true of a puddle of water. And he says that the best moat would be to have a big competitive position, and that is also right. Warren does not intend to build an actual moat. Even though they're quaint.”
Intrinsic Value – Buffet recommended investors buy businesses where return comes from the cashflow promise each year rather than the hope that someone will buy it for more in the future.
He used the example of gold where, in 1942, one could have invested $10,000 that would now be worth $400,000. In contrast, that same $10,000 in the broad U.S. stock market would be worth $51,000,000 today. In fact, Buffet emphasized, you wouldn’t have even had to pick the top stocks; you could simply buy a low-cost U.S. stock index fund.
On Bitcoin investing, Buffet again pointed out the inherent risk of investing in something that is only worth what someone else will pay for it in the future. He doesn’t like it.
Munger doubled down with this line, “I like cryptocurrencies a lot less than you [Buffet] do. And so, to me, it's just dementia. And I think that people who are professional traders that go into trading cryptocurrencies, it's just disgusting. It's like somebody else is trading turds and you decide I can't be left out.”
What Counts Most – When it comes to investing, Buffet contended that what matters most is a philosophy you can stick with. In his early days of investing, Buffet found Ben Graham’s system. Taught to him at Columbia Business School and explained in Graham’s book The Intelligent Investor, it was an approach he could believe in and follow consistently. Then he met Munger, who broadened his thinking to a system that doesn’t put primary importance on buying companies only when they are ridiculously cheap.
At the core of what these men do, however, is a fairly objective recipe. They know the ingredients that are going to work in an investment: a wide moat, intrinsic value and a fair price. They also make sure to strike in their circle of competence—industries and businesses they know.
Quipped Buffett, “We want products where people feel like kissing you, not slapping you.”
Lastly, the pair also emphasized how they typically won’t acquire another company unless the management approaches them and has a commitment to continue serving, unlike most venture capital or hostile takeovers so common today.
Theme #2: Business Challenges of Today
Trade War with China - Buffet is optimistic that the U.S. and China will avoid a serious conflict on trade and that there will be a win / win among the two business super powers.
"I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war," Buffet said at the shareholder meeting. "There will be some back and forth, but in the end, I don't think we'll come out with a terrible answer on it."
Specifically, Munger stated, “The conditions in steel were almost unbelievably adverse to the American Steel industry. Even Donald Trump can be right about some of this stuff.”
Munger also pointed out that we used to be more balanced between our imports and exports as a percent of Gross Domestic Product. Now there is a gap of 3.5% which implies that foreign entities have more money to invest in the United States than we have to invest in them. What effect does all this have on American workers? Trade deficits, even in times of strong growth, have negative, concentrated impacts on the quantity and quality of jobs in parts of the country where manufacturing jobs diminish. In addition, a trade deficit can have a role in producing financial-market bubbles and the devastation that’s caused when those bubbles burst. Thus, trade deficits do matter and should not be ignored.
On Healthcare - A number of questions came up about Berkshire’s collaboration with Amazon and Chase to improve their own health insurance costs. Buffett stated, “In 1960, the average healthcare spend per capita was $170, whereas now it is $10,000 a year.” He feels that it is a hugely non-competitive factor, a “tapeworm on American business.”
Munger pointed out that improving the current system is nearly impossible. “I suspect that eventually, when the Democrats control both houses of Congress and the White House, we will get a single-payer medicine, and I don’t think it’s going to be very friendly to many of the current PBMs (pharmacy benefit managers).”
Also, Munger mentioned that there is a past precedent for business jumping in to improve healthcare. He referenced John D. Rockefeller, who partnered with Carnegie Mellon, to push healthcare institutions to revamp, standardize, and centralize their institutions in the early 1900s.
The next step for Berkshire’s collaborative with Chase and Amazon is to hire a CEO to run the new healthcare company.
Theme #3: On the Future of Berkshire
The Q&A started off with a question from journalist Carol Loomis: “Is Buffett semi-retired?” After all, he shares his investment responsibilities with portfolio managers Ted Weschler and Todd Combs, and he just promoted Ajit Jain and Greg Abel to new jobs overseeing Berkshire's operating businesses.
"I've been semi-retired for decades," Buffett said. But he points out that Weschler and Combs oversee about $25 billion in stock investments, while Buffett himself is responsible for tens of billions more in stock and bond investments and about $100 billion in cash.
According to Buffett, nothing’s really changed that much since the recent promotions. "I think, actually, semi-retired probably catches me at my most active point."
At that, Munger joined in with a zinger: "Buffet is very good at doing nothing."
Next, an analyst asked whether Buffett's successors can continue Berkshire's record of throwing lifelines to struggling companies in exchange for very good returns. (Berkshire helped companies such as Goldman Sachs, General Electric and Bank of America in the years following the financial crisis.) Part of the appeal to those companies is Buffett's seal of approval, after all.
Buffet said that, even today, some of Berkshire's investments are arranged by portfolio managers Ted Weschler and Todd Combs, not by him. In fact, there's a deal under consideration right now that either Weschler or Combs brought to his attention.
"I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me," Buffett said. "We will continue to have our standards of what we think money is worth at any given time. And Ted and Todd think just as well about that as I do."
Munger added, “Those of you who, after we are gone, sell your Berkshire stock and do something else with it, I think are going to do worse. So, I would advise you to keep the faith.”
Theme #4: General Life Advice
Continue Learning - Both investing titans mentioned quite a few times the importance of learning.
Munger quipped, “If you stop learning, you become a one-legged man in an ass kicking contest.”
In nearly every meeting, Buffett refers to one book that changed his life — Benjamin Graham's The Intelligent Investor.
"All of the important ideas are in that book," he told shareholders. Specifically, he advised the audience to read chapter eight on short-term market fluctuations, which underpins one of Buffett's most successful investing philosophies: Sell when others are greedy and buy when others are fearful.
Buffet and Munger are the ultimate role models in the quest for lifelong learning. How else would these two inspirational and successful business figures talk off script for five hours at their late ages with such wit and intellect?
If you want to learn more, go to https://buffett.cnbc.com, an amazing site that has all of the past Berkshire meetings recorded.