At the start of May, Tony Finding and Eric Lonergan made their annual ‘pilgrimage’ to Omaha in the US to attend the annual shareholder meeting for Berkshire Hathaway, the investment company run by Warren Buffet. In the second of two blog posts, Eric discusses his key takeaways from the experience. What can Buffett do that others can’t?
Warren Buffett and Berkshire Hathaway
Tony Finding and I have made six consecutive visits to the annual shareholder meeting of Berkshire Hathaway. We continue to regret not starting sooner.
Beyond his investment track record, what is striking about Warren Buffett is his uniqueness as a capitalist. He is clear, articulate and invariably right about the important issues, and yet he is not widely replicated.
- On buybacks and dividends he correctly points out that dividends are inefficient and the case for when to engage in buybacks is simple: buy back your stock when it is cheap (or in his terms, ‘trades at a discount to intrinsic value’). Why don’t all corporates estimate fair value for their stocks and engage in buybacks only when the stock trades at a significant discount?
- On executive pay he is clear that management should own equity to align interests with shareholders, and not options. And share in losses. Right again.
- On insurance underwriting he points out that volatile earnings are more attractive than smooth earnings. Why? Because you should write more policies when premia are high, and none when they are low. What other major insurance company trumpets the volatility of their earnings?
Clarity is also at the core of Buffett’s skill as an investor. The real nuggets at the shareholders’ meeting are often short riffs of industry or stock analysis. After listening to his analysis of a Wells Fargo, an IBM, the building products industry or Coca-Cola, it seems obvious where their profitability resides, and why they have monopolistic characteristics – or wide moats, in Buffett-speak. It’s obvious, after you’ve heard Buffett explain it. Like perhaps all great investors he sees things which other investors don’t. Things which are not hard to understand, but are hard to perceive.
The great MIT economist, Paul Samuelson, who paid a lot of attention to Buffett (and hedged his theoretical bets by buying Berkshire stock), used to argue that he had learnt from Schumpeter that creative destruction guaranteed that the capitalists celebrating on the top floor of the best hotels would change every 10 years or so. Competition and technological innovation guaranteed it. This may be a plausible description of how much of the economy operates, but Buffett seems to have proved a significant case to the contrary: there are businesses which have enduring monopoly power residing in brands, network effects, scale economies and superior decision-making which can endure for many decades.
There are many other reasons to travel to Omaha. Tony and I get to obsessively discuss the investment landscape over several days, away from screens and day-to-day noise. Omaha is not somewhere you would otherwise visit. But the culture of the mid-West helps you understand aspects of America you don’t ordinarily see. The shareholder meeting is a uniquely American cultural phenomenon. Where else would you get 30,000 people applauding such quotes as ”wealth should be won fairly and used wisely”?
Buffett and Munger are often described as advocates of “homespun wisdom.” That’s a misleading understatement. They articulate something closer to enduring, fundamental values –“Chains of habit are too light to be felt until they’re too heavy to be broken.” Values which despite their universality are rarely articulated anywhere else in our culture. It is little wonder that investors from the world over travel to see them.
A trip to the Berkshire Hathaway shareholder meeting is many things. It’s quite inspiring to see a corporate CEO, aged 84, take unscripted questions over five hours, displaying an extraordinary degree of factual recall spanning a vast array of businesses, and covering a span of history dating back to the depression. You are reminded why the S&P500 should trade at a premium – capitalist culture in America is unique. And you come away thinking that most things could be done a lot better. This year, Buffett and Munger described their corporate culture succinctly, people at Berkshire Hathaway “see things as they are.”