This year, I attended my first Berkshire Hathaway AGM. I have not been before because watching the livestream at home seemed a more comfortable option. But I thought this could be my last chance – Charlie Munger is 99, after all. So I booked at very short notice and I enjoyed some legendary hospitality from my American friends. My weekend highlights were meeting up with like-minded investors at a series of conferences and talks, but here I have rounded up a few thoughts from the event itself, which is always both highly entertaining and educational.
Warren Buffett opened in jocular style, mentioning the other popular TV show that day, the Coronation of King Charles III, but quipped “We have our own King Charles”, gesturing to Munger. This was the tone of the meeting – fun.
Buffett kicked off by going through the first-quarter (Q1) earnings. I was interested in his comment that most Berkshire companies will report lower earnings this year. Insurance and the much higher yield on cash will mean Berkshire should grow earnings overall. But Buffett talked of the former period being extraordinary and that the climate was different from six months ago. Several managers have over-ordered and will need to have sales to get rid of stock. I thought Buffett was flagging a high degree of caution – I wonder if S&P 500 forecasts are low enough?
Buffett talked of Berkshire’s $125bn of cash yielding 46bps last year. Higher rates should convert that $50m-ish of income into closer to $5bn. He bought $3bn of bonds recently yielding 5.9 per cent – likely the four-week bill auctioned with demand depressed by debt ceiling worries. It’s worth considering company balance sheets and the interest-rate-induced benefit to income on cash or increased costs of floating debt.
There were some striking numbers on Berkshire’s size:
- Float is now $165bn
- Net worth is $504bn (larger than any other US company and I imagine the highest in the world – Aramco is $386bn)
- Retained earnings should be $30bn-$35bn this year
- Cash is c$125bn
- Cash flow was c$7bn in April alone.
Berkshire is a giant. The arena for the AGM was also huge – the crowd was over five times larger than the concert I attended at Wembley Arena the previous week. And the two old men, drinking Coke and with Munger eating peanut brittle, were on amazing form.
My AGM notes
Insurer GEICO – will take two years to get back on track.
BNSF – post-pandemic, supply challenges and labour issues are problematic in getting the freight rail business reset for the longer term.
Commercial real estate – we are starting to see the consequences of borrowing at 2.5 per cent and finding that purchases made then don’t work at current rates – ie problems in store.
Value investors – there are too many of them and they need to get used to making less. I think this was a reference to markets being unlikely to deliver past returns going forward as there don’t seem to be that many value investors left.
Energy transformation – they have $70bn of such projects over the next 10 years.
College – Buffett stated that he never looked at where a potential hire went to school.
Insurance – if there is a hurricane in Florida, they could lose $15bn (5 per cent of $300bn capital). Otherwise, they should make $7bn.
Continuous learning – I lost count of the number of references Buffett made to the fact that they continue to learn all the time. This to me is the duo’s most laudable characteristic and one we should all copy – stay humble, keep learning and keep improving.
Apple – Aswath Damodoran, professor of finance at the Stern School of Business, criticised the concentration of the Berkshire equity portfolio and said that Apple (US:AAPL) was too large a part. Buffett doesn’t think of it that way – he views Berkshire’s exposure including all the subsidiaries, and considers Apple as a far better business than the subsidiaries and, given the share repurchase program, Berkshire’s ownership keeps growing – Buffett cited the buyback required for Berkshire’s holding to reach 6 per cent of Apple off the top of his head.
OEMs (original equipment manufacturers) competing in insurance – had Cathie Wood, founder of investment management firm Ark Invest, attended, she would have learned that General Motors (US:GM) has been doing this for decades and that a lot of data is needed on the driver. Buffett watched Uber (US:UBER) doing insurance for its gig workers and thought that they would get their heads handed to them until they did a deal with an insurer. We already know that the Ark valuation for Tesla (US:TSLA) insurance is more than ambitious. Margins in auto insurance are 4 per cent and if new competitors come in, they will shrink; the last new idea in insurance was State Farm in the 1920s; as a mutual they took 20 per cent out of the cost and nobody has improved on that system.
Banks – Berkshire owned a bank in the 1960s and thought it was a more attractive industry with more opportunities than insurance, but the Bank Holding Company Act forced them to divest.
Streaming – BRK owns 94mn shares in Paramount (US:PARA), which cut its dividend the previous day. They pointed out that a lot of companies are doing streaming and that eyeballs are not increasing nor is the time spent viewing going to increase. They therefore think it may be difficult to increase prices. Munger highlighted that the movie business is tough because the talent gets all the money.
Climate change – there is a lot of nonsense talked in this field. If you like nonsense, this is the field for it.
Occidental – they will not take control
Fun – part of the fun of investing is the mistakes. If you play golf, it would be no fun if every shot was a hole-in-one.
Cheap – Munger used to fly to the AGM from LA. A lot of people flew to the AGM in eonomy and when Munger got on the plane, they used to applaud him.
Autos – EVs have a huge capital cost and that’s a risk for the OEMs. Ferrari is in a special place but production is only 11,000 cars a year. “Ebitda was bad enough but now it’s earnings before everything”
Accounting – Buffett wants the balance sheet to show the market value of securities with gains and losses taken through other comprehensive income, for banks and others. I totally agree – it makes no sense for Silicon Valley Bank not to show unrealised losses in its balance sheet while Berkshire is forced to book equity gains through the P&L. According to Buffett, this is “bonkers. I don’t know what the accountants were thinking when they made this change”. I agree – the accountants have totally lost the plot.
