As you know from last month’s notes, we recently traveled to Omaha, Nebraska to attend the Berkshire Hathaway annual meeting. It was our first opportunity to sit in a very “intimate” setting with +20,000 of our new best friends and listen to Warren Buffet and Charlie Munger, two of the most legendary investors of our time. Buffet and Munger run the Berkshire Hathaway company, which as a “holding company” owns other companies, such as GEICO insurance, Dairy Queen, Clayton Homes, Shaw Industries, Helzberg Diamond, and See Candies, just to name a few. Investing since the early 60’s, Buffet and Munger made names for themselves as value investors. By actively identifying and buying well run companies at attractive prices, they have delivered significant long term value for their shareholders. If an investor had bought Berkshire shares in 1965 when Buffet took over the company and held them through 2016, (s)he would have enjoyed compounded annual returns of 19% over those 52 years (almost twice the return of the S&P 500 over the same period).
Any reference to a specific security is for informational purposes only and is not an offer to buy or sell securities. Past performance is not indicative of future results.
Now in their late 80’s and early 90’s, respectively, both Warren and Charlie offer answers to shareholders’ questions at each annual meeting. Running on a steady diet of coke (for Warren), diet coke (for Charlie), candy, and peanut brittle, the duo answers questions for roughly 8 hours with only a lunch break in between. One of the shareholders jokingly complimented them before the entire 20,000-person crowd on their seemingly iron bladders.
The discussion covered everything from the investment process, the persistence of returns, the current investing environment, technology, energy, philanthropy, the Asian investing culture, succession planning, the widespread lack of planning, fees and more. Nothing seemed off limits. There is so much worth sharing, that we decided to spread it over multiple Notes. Today we will touch on some of the highlights.
When asked about what they look for in a company, both Warren and Charlie agreed that they seek out companies with a sustainable competitive advantage in their respective industries. They also spoke of the importance of corporate culture. While some value investors prefer buying troubled companies at low prices—hoping that their stock prices will rebound as they work out their difficulties, Warren and Charlie warned of falling into the trap of trying to “fix” the “unfixable”. This was a lesson learned early on by Buffet following his purchase of a controlling stake in a struggling textile mill known as…Berkshire Hathaway! His investing success ultimately came from getting out of the textile business, rather than trying to “fix it”. The lesson is that even for value investors, value is found in the quality of what’s being bought more than in the price being paid.
Closely related to this is their advice that people should invest in what they understand. During the 1990s, Buffet didn’t invest in tech companies because he didn’t understand them. While he was roundly criticized in 1999 for missing the dot-com-boom, he was vindicated when he subsequently avoided the tech crash. Munger might say that those chasing the dot-com stocks were trying to be brilliant, while he and Buffet were just being rational…investing the way they always had and in things they understood. As Munger often says, “Fish where the fish are.”
In a more sobering moment Warren warned investors to have realistic expectations for the future returns of Berkshire Hathaway stock. Citing changes in the investing landscape such as the increase in both the availability of information and the competition for good deals, they warned investors to expect mid-single digit returns going forward. “It used to be easy”, said Munger. While Berkshire’s outperformance since 1965 is impressive, it’s return for the last 15 years (at just above 8%) has barely exceeded that of the S&P 500. It is very telling that two extremely successful, long term, investors are trying to lower shareholder’s future expectations.
So, where are the “fish”? What are our investment expectations? What do we do with the money we have? These questions hit every investor every day, and they are as important to our individual clients as they are to firms like Berkshire Hathaway. As advisors, our goal is to help our clients answer these questions, to match the answers with an appropriate investment portfolio, and to pursue their goals with rationale rather than with brilliance.