I recently attended Berkshire Hathaway’s Annual Meeting. I collected some notes that I want to share with my readers. In here you’ll find some useful nuggets of information.
If you aren’t sure why this matters since it is just one company, Berkshire Hathaway’s Annual Meeting is an event in Omaha, Nebraska where investors, journalists and analysts from all over the world come to hear Warren Buffet and Charlie Munger (the CEO and right hand man) speak, it has become a capitalist pilgrimage.
For instance I myself was in line at 4AM to get a seat just behind the board members who have the front section. There were around 44,000 people in attendance this year, filling a whole sports stadium (Century Link)!
- Recommended reading during the meeting:
- “Business Adventures” by John Brooks
- “The Most important Thing” by Howard Marx
- Read Adam Smith’s, “Wealth of Nations” per both WARREN BUFFETT and CHARLIE MUNGER
- Of course Warren recommended his mentors books as usual “Securities Analysis” and “The Intelligent Investor” by Benjamin Graham.
- Buffett uses humor frequently to make him seem more approachable and to relax/diffuse things
- “One of us can hear and one of us can see” referring to himself and Munger.
- He was very focused in his responses with anecdotes to past transactions and facts.
- Paraphrasing here but basically Warren said:
- Most of what they focus on is looking for reasons NOT to do a deal. What would stop us from making a deal? Who are they in business with? Do we want to be in business with them?
- They say they have no interest in talking up their “book” (stocks they own) because they are going to be buying up more and so if prices go down, they will buy more at a better price. This is the exact opposite of every other Wall Street manager who always talk the book up for whatever reason. He sees it more as loose lips sink ships.
- “If people weren’t so often wrong, we wouldn’t be so rich”- Charlie Munger
- Buffett says he had 3 great pieces of luck in his career
- Got an insider’s view on insurance early on from GEICO employee he met with
- Surrounding himself with great people like Charlie, Graham etc.
- 3rd piece? He didn’t say or I didn’t catch it
- Munger: “We all have luck, but to a large degree we make our own luck. How many 21 year olds go to the headquarters of a public company on a weekend and knock on the door to meet with someone and learn about their business?”
- This was in reference to Warren Buffet’s famous story turned almost legend. See the full details here if you are interested.
- I noted that Buffett predicts the future with some bad things in it so when and if those bad things come true, it is not a total surprise to shareholders and he can say he knew it would happen so don’t panic things will be fine.
- For instance, at the meeting he says there are probably a handful of people who are doing things they should not. He thinks that the managers will find it before it is a problem, but they can’t be perfect. Something bad occasionally will happen.
- Same thing he says about railroad crashes: “Safety at the railroad and our pipelines is our number one priority, but there will be accidents no matter what.”
- Focus on safety as part of their reputation protection.
- Buffet: “Culture is everything at Berkshire,” in reference to why they get great results from their investments, how they retain great talent, how they avoid major scandals of other large companies.
- Buffet: “Culture can only become institutionalized from top down and you have to live it, not just talk it.”
- This is in regards to Berkshire culture about the focus on long term growth, not managing quarterly results.
- When speaking about how to be a great manager and business person, Buffet said, “Try to behave as if your positions were reversed.”
- Charlie Munger said something to the effect of, “We have always been dissatisfied with what we know and we are always trying to learn more.”
- He later went on to say an extreme focus on rationality is what he brought to the partnership that was always his focal point. He said “It is immoral to be more ignorant than you have to be,” meaning there are so many resources available that often it is just laziness, not lack of access.
- There was a question about if he feels the market is currently overvalued at 125% Total Market Cap of Stocks/Gross National Product (GNP; this was in reference to a 2001 article in Fortune Magazine where he said, “It is probably the best single measure of where valuations stand at any given moment.”) Part of the same question it was referenced that corporate profits as % of GNP as another metric to track. Now at 10.5% which is above where we were in 2008.
- See charts below to show
- Buffet: “Macro factors to change our investment decisions we know that we don’t know the future.” He also said he doesn’t make predictions on the economy, so he kind of dodged the question. They buy good companies in the long run regardless of what they do in the short term.
- Buffet said every time they issued shares to buy something it was a mistake.
- Buffet said his friends and family are invested and he thinks of all his investors as family and that he couldn’t handle losing their money.
- He then went on to say, “I would rather be 100x too cautious than be 1% too risky.”
- Munger follows up: “We could have grown faster but not slept at night because of debt [aka risk].”
- Buffet said we are all operating in a world we don’t understand very well. Relating to negative yielding government debt and high treasury balance sheet.
- Buffet said they have $60BN in cash on hand right now and they are being patient looking for new investments
- Buffet: “Charlie and I believe in the power of incentives.” This was in regards to not incentivizing people to do the wrong things as well as keeping them by giving them rewards for doing the right things.
- Warren said something to the effect of:
- Worry about ego as incentive for bad behavior. People don’t want to look bad or do bad or make their bosses look bad and will often do things that they otherwise would not do in order to protect their ego.
- Be careful about joking too much in the message you send your direct reports. Warren shared a story about an insurance employee whose boss joked every time he reported a big loss (something like “You’re killing me!”) Even though he was joking, the employee took it to heart a bit and started to hide losses that were coming in to avoid being teased, which was harmful to the company.
- Buffet: “When you buy stock, you own a small piece of a company.”
- Munger: “People are looking for an easier way [than value investing] but there is no easier way!”
- Buffet: “Best part about real estate is that it isn’t quoted every day, so it’s easy to own long term”
- Talking about how the tendency to look at stock prices often causes people to buy and sell when they should do the opposite. He thinks real estate is a good way to avoid mistakes in investing the same way he thinks index investing in the stock market is good for the average investor to avoid similar mistakes.
- Charlie thinks the Chinese market is overheated due to speculation but he also said China and the US need to be better partners to each other. It is the most important thing they can both do to grow.
- Buffet: “I learned a lot of operations by being in operations.” This lead me to the belief that we should hire more property managers to do asset management and higher level things because they actually know how to run actual real estate assets from the ground up.
- My insight: Focus on how you can widen your moat. Figure out your competitive advantage and expand it. Is it brand? Is it quality of product? Is it government contracts?
- Munger: “We are not searching for a ‘robust narrative,’ we are in it for the long haul others are just pretending to.”
- “Praise by name, critique by category.” Warren Buffett stated this when Charlie Munger called out names of specific money managers that he thought were not doing a good job.
- Next year, I want to take the University of Nebraska Omaha class about value investing that happens for 3 days around the annual meeting. I heard about this from a nice money manager I met in line at the meeting. See more here if you are interested.
- Buffet: When they started, they didn’t have the metrics figured out and they knew their limitations and didn’t invest in lots of things. They kept reading and thinking of things that come along.
- Early on they were always capital constrained, so they had to sell something before they could buy something new. This had the added benefit of ingraining in them that they really liked the new investment MUCH better than the old investment.
- “Nothing gives you as much wisdom as getting your nose whacked.” Knowing bad business helps you find good ones and so does having fun. (Comments by both Warren Buffett and Charlie Munger.)
- Munger: “Become as rational as you can possibly be.”
- Munger: “Rationality is a moral duty.”
- Munger: “More than anything, Berkshire is a temple of people who see things the way they are.”
- Munger: “We hate losing other people’s money.”
- Multiple questions about 3G investments.
- Buffett was not really defending it but not really attacking the question either – more like dodging the question.
- This was interesting because the crux of the issues is 3G is seen more as a typical private equity firm working “ruthlessly in many people’s eyes towards profit” through layoffs etc.
- Investors were angry because they see Berkshire as a private equity company with a heart.
- This issue was not resolved and I too am on the fence about this issue.
- I believe as Warren and Charlie said that our country is stronger with these efficiencies achieved but I also thing that private equity can go too far sometimes squeezing out profit and overloading with debt to the point of ruining many good businesses and flipping them to fail later on after they leave.
Questions I came away with:
- They talked about and praised Henry Singleton. Who is that? Why is he important?
- How does Berkshire structure their taxes currently? There was some conversation but I am still not clear?
- How does the $60BN of current cash on hand as percentage of total capitalization of Berkshire match up with the last peak? Could this help indicate a new market peak based on this anecdotal indicator?
- How do they hold their cash now? Short term US treasuries? Other bonds?
- He spoke of starting a “secret millionaire club” for children. What is that?
Written by Mark A. Mascia, President and CEO of Mascia Development
Mark manages the investment and operating activities of Mascia Development, a diversified value real estate investment firm that acquires, owns and manages retail, medical office, family offices, multi-family, and industrial real estate properties in the most promising long term growth areas nationwide. Through crowdfunding, they create powerful real estate opportunities for high net worth individuals.
A fully integrated real estate company, Mascia Development has in-house capabilities in acquisitions, financing, re-development, and construction; and their principals have experience in property and portfolio management, leasing, and maintenance.
Mark has a strong career in real estate, previously managing a property of portfolios valued over $1.1 billion. Mark has worked at Archstone-Smith (a former publicly traded REIT) and Monument Realty, one of the largest office real estate developers in the Washington, DC metro area. Mark teaches real estate development and finance at New York University.
For more information, visit www.masciadev.com.