Berkshire Hathaway Memo

First, some comments on the pre-AGM webinar hosted by Professor Lawrence Cunningham, then I will comment on Berkshire Hathaway (BRK). Professor Cunningham occasionally does this kind of event and is generous with his time. Here’s the recording.

There were about a thousand of us on Zoom. Professor Cunningham did something similar two weeks ago when for the launch of his new book: Dear Shareholder: The best executive letters from Warren Buffett, Prem Watsa and other great CEOs (see post). Professor Cunningham is a Buffettphile. Lawrence is a professor of law at Georgetown. But he’s better know for his work Buffett and BRK. Lawrence has done a great job representing Buffett’s views. He had access to Warren for over twenty years. He has documented many angles of BRK/Buffett through the years. If you are an investor and you want to get better, then the book you should read The Essays of Warren Buffett: Lessons for Corporate America. A new edition comes out every five years to stay current with Buffett’s views. The book covers a lot of topics. Corporate governance, culture, management, values, investing etc…really it’s a gem. It’s not that big and packs a lot.

Anyway the pre-AGM meeting was good to get into some-kind of BRK groove. I don’t know if you have been to a BRK AGM, but an online AGM doesn’t quite catch the vibe. If you are a value investor, you have to attend at least once in your life. Hopefully we can defeat COVID-19 ASAP and move on to better things.

Berkshire Hathaway Notes

It goes without saying that BRK is a special company. There’s nothing else like it. There are clones, but they are not as successful. Maybe except for Markel Corp. (MKL) which is probably the best clone I can think off. MKL emulates BRK and Buffett in many ways. They have good insurance companies, good management, good businesses, a good culture and a great shareholder letter. Fairfax has solid insurance companies but is lagging behind on the investment side. I don’t know if there’s something equivalent of a BRK in Europe or Asia (there are a lot of giant conglomerates). The BRK recipe has been laid out. You can copy it. But the large majority can’t do it. BRK has such a unique culture which explains why it’s hard to replicate (autonomy, decentralization and trust). Also people don’t have the patience. Everybody wants to be rich but they don’t want to do it slowly.

That Cash Pile

BRK Cash

BRK is sitting on $137 billion and he’s getting heat for it: “He’s not buying anything, he missed the dip, he didn’t do enough buybacks etc…” So who cares about sixty years of investing greatness. Really I don’t get the hate. I saw a video of a guy on Twitter burying a Buffett book. To the people that are giving Buffett crap for having all that cash, just take a quick look at the state the companies that don’t have any cash are in.

I don’t know about you but that pile of cash looks really good right now. We are a quarter into this Covid-19 mess. There’s a lot we still don’t know. We have no clue how this will play out. A second wave? Another shutdown? An Italian style public health crisis? We will get out of this mess eventually, but when and how much it will cost are unknown (astronomic!) A lot of people pretend to know, but nobody knows.

The current market rebound doesn’t reflect the reality I see right now. People are losing their businesses, their jobs, their savings, debt is pilling up…none of this is a quick fix. I understand that the market is forward looking and that most of the valuation is on the back end (terminal value). We will have a better idea of the real damage done in the summer and fall once bankruptcies starts to flood in. Governments are telling restaurants to open at 50% capacity. Do you know how hard it is to make money with a restaurant running a full capacity during good times? What about these stores in the mall? The current market rebound is based on the central banks doing everything there is to do to at any cost.

Buffett also said this about the $137 billion he had on hand: “Isn’t all that huge when you think about worst-case possibilities.” He’s certainly in a better position than anyone to make that judgement call.

The Fed

Back during the Financial Crisis of 2008-09, BRK made some of the sweetest deals. Buffett saved Goldman Sachs, General Electrics, Bank of America, Harley Davidson, Tiffany and I’m sure they are more. He had money, they needed it.

This time there were no deals. The main reason was the the Federal Reserve and government stepped in very aggressively.  They learned from the last crisis. And you can’t compete with their terms.

Buffett Federal Reserve

As a consequence of their buying spree of epic proportion, the Federal Reserve’s balance sheet has exploded to over $6 trillion. Look at that spike at the end of the graph. That’s one swollen balance sheet.

Federal Reserve Balance Sheet
Federal Reserve Balance Sheet as of April 29, 2020

Bearish

Buy American
Six months before the bottom in March

Buffett is known for his eternal optimist. People turn to Buffett for some-kind of hope. Back in 2009 he wrote an op-ed in The New York Times saying he is buying American stocks! Then the market went down for another six months. But his message and action remained iconic. Having the right temperament and attitude can help you navigate hard times.

Last Saturday listeners where waiting for this kind of up-beat mood lifter and let’s just say they got buzz killer. He came across as quite bearish (more realistic IMO) during the virtual meeting and that’s scary. Investors turn to Buffett for guidance during hard time.  Stocks are apparently low (kind of not really) and he’s not buying. It’s probably not the message investors wanted to hear. But sometime you need to hear the truth. And right now the truth is not going to be pretty for a while. Remember he’s an Oracle…

You have to understand that through BRK, Buffett has a direct pulse on the business world, from small to big businesses from many different industries. He knows what is going on.

Also when Bill Gates is your best friend, and Bill seems to knows everything there is to know about pandemics and Covid, you are probably getting better facts than the White House briefings.

“I Don’t Know”

Buffett said “I don’t know” a lot during the meeting. Smart people says I don’t know a lot.

I think we don’t say it enough. Buffett understands his circle of competence. If it’s out of his league, than you get a “I don’t know”. It’s important to be intellectually honest. That way we can grow and make less mistakes. We should say “I don’t know” more often. It will prevent less b.s. floating around.

Successor

Nice to see Greg Abel up there. We got an extensive look at a man who could succeed Warren Buffett. He looked good. He demonstrated very broad knowledge across the company. Abel is a vice chairman for non-insurance operations. Abel gave investors a sense of how those operations were adjusting to the coronavirus pandemic and economic landscape. The other candidate for succession, Ajit Jain, is the vice chairman overseeing the insurers.

Buffett Exits Airlines

How to you become a millionaire? You start off as a billionaire then buy an airline.

Buffett sold all his airlines. Good riddance. “When we change our mind, we don’t take half measures”. To Buffett’s credit, he didn’t nor seek to assign blame elsewhere. He just said he made a mistake.

There’s probably other motives too. Buffett is the 2nd or 3rd richest man in the world and ex biggest investor in the airlines. Just think of the headline: “Billionaire Buffett’s Airlines receive bailout money” or “$137 billion cash pile and Buffett needs government help”. Buffett is careful of his image and he doesn’t need that political/public backlash that would have follow. Billionaires don’t need a bailout.  He made a mistake, recognized it, and move on.

Quiet Buffett

As the coronavirus crisis unfolds, many are asking: Where is Warren Buffett? They want to hear and see more from the famed investor, noted for both calm and prowess in times of distress. Well he did an one interview back in February (CNBC) and another one in March(Yahoo! Finance). His AGM was coming up so most likely save the spot for all the questions. Buffett has already given the world so much. He’s 90 years old. He’s been doing this for sixty plus years. He doesn’t owe us anything more than he’s already said and done.

It’s possible there are other forces at work here. We are in a pandemic and recession. I’m not sure it’s smart to have Buffett hopping around of happiness like a little kid because “the supermarket is on sale” while people are dying or losing their jobs, money, or business.

The End

End

3 thoughts on “Berkshire Hathaway Memo

  1. I don’t really have anything to add except that I really appreciate your blog and the posts you do and I’ve done so now since I discovered it via the post about Moleskine.

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