Takeaways from Berkshire Annual Meeting 2022
It seems to me that this year’s Berkshire annual meeting did not contain that many insights as the previous two. In some cases the questions were not that interesting, in some cases Buffett and Munger dodged the questions (e.g. the one about investing in China). Anyways, there is always something useful, so this traditional 6-hour listen looks like a reasonable investment of time (especially at 1.5x as the patriarchs speak rather slowly). On top of that, Charlie’s and Warren’s sparkling sense of humor definitely makes the listen more enjoyable.
Warren: “Is it wise to criticize people at all?”
Charlie: “Probably not, but I can’t help it!”
Berkshire’s AGM has become a kind of pilgrimage for those worshipping Buffett and Munger: 12,000 people attended in person this year. FinTwit was full of happy investors bragging that they got the tickets. Berkshire prepared 11 tons of See’s Candies to be sold to the shareholders (we don’t know the actual sales, but Buffett claimed that he and Munger would take anything that doesn’t get sold).
Investment approach
3.5mn shareholders trust Berkshire - this is a great motivator. Given the enormous trust, Berkshire has extreme aversion to permanent losses of capital
Berkshire’s key metric is operating earnings after depreciation, interest and taxes
Berkshire will always have lots of cash so that it can withstand a crisis of any magnitude (save for nuclear war). Importantly, cash means only T-Bills, i.e. no money market funds, commercial paper or other instruments that may not be that liquid during a major crisis
It’s easier for Berkshire to invest in the US than abroad because they have been following many US businesses for multiple years, plus they can usually meet in person and make a decision fast
Berkshire is not into market timing, they are not trying to predict where the market or the economy goes next. Historically, they timed the market successfully from time to time, but also had a number of misses, e.g. deploying capital too early in 2008
Investing is much simpler than investment advisors suggest (because they profit from the perceived complexity): just invest and hold for the long term
As Charlie put it, “the world is mildly ridiculous”: advisors are charging fees for outperforming the indices and then are afraid to be too different from the indices so that they don’t lose their clients
Berkshire’s investments
Invested $41bn in 3 weeks of Q1 2022, including $11bn in Alleghany
Added $600mn to Apple position in Q1 2022 (the total position is ~$150bn)
Managed to buy 14% of Occidental Petroleum within 2 weeks thanks to abundant liquidity which is unheard of by historical standards
While the initial decision to invest in Activision Blizzard was not Buffett’s, he decided to go for a merger arbitrage trade after the acquisition by Microsoft had been announced (ATVI still trades at ~$80 today while the acquisition price is $95: apparently the market assigns a significant probability to the deal getting blocked - YM)
Repurchased shares worth $3bn in Q1 2022 and none in April. Berkshire buys back stock when it believes this benefits the remaining shareholders (did not specify a particular rule of thumb for the decision). Berkshire is unlikely to get an opportunity to buy back a lot of stock at a significant discount because its shareholders believe that the management is sensible, hence buybacks are likely to signal that the stock is undervalued
When asked about BNSF and GEICO (cornerstone investments for Berkshire) underperforming vs competitors, they accepted that there is room for improvement (especially in GEICO which is lagging behind Progressive Insurance), but assured that the businesses are still great
Charlie dodged the question about his current view on investing in China. He reiterated that his rationale for investing in Chinese internet stocks was that he could get better businesses at lower prices compared to the US market. He also noted that everyone has obviously become more risk-averse towards China in the last 2-3 years
Macro and markets
In March 2020 the world was very close to 2008 scenario or even worse
Jerome Powell is a hero because he acted so fast and decisively. He could have easily become hesitant and blame the outcome on the virus. If Fed hadn’t injected that money into the system, the US economy would have been much worse now
Sometimes the market is investment-oriented, sometimes it’s a casino (like the last two years). Naturally, Wall Street encourages activity as this generates fees
When Buffett was 20 he went to a casino and was fascinated by the number of well dressed people, many of them having taken a long way just to play a mathematically losing game. At that point he decided that if people behaved in such a stupid manner, he would become rich
Robinhood has a disgusting business model based on gambling and kickbacks. The tremendous fall of their stock from the highs was obvious
Berkshires gets a chance to make good deals not because they are smart, but because they are sane. Crazy gambling makes it easier for Berkshire to make money
Inflation:
The amount of money given away to people had to cause inflation
Nobody knows what the inflation will be and for how long
Buffett’s 1970s article about stocks and inflation is still valid: companies cannot keep the same ROE as their assets keep inflating
The best way to fight inflation is to be exceptionally good at something - in this case you will always generate decent income, no matter what nominal prices are. Hence, the best investment is what develops yourself
Crypto:
Buffett’s and Munger’s view has not changed: they despise crypto
While Buffett cannot predict Bitcoin’s prices, it’s obvious that it is not a productive asset (I think he has a somewhat similar view towards gold - YM). He would decline an offer to buy all BTC in the world for $25
Munger: Bitcoin is stupid (very likely to go to zero), evil (undermines the Fed Reserve system and the US currency system) and makes the US look foolish (in contrast to China which banned crypto)
Oil:
Charlie would rather be stockpiling oil for the SPR (strategic petroleum reserve) rather than depleting SPR which the government is now doing; he believes oil will remain a very valuable resource
Oil industry has been unjustifiably villainized
People are behaving somewhat more tribal now which is not a good thing. This resembles 1930s: for example, you either loved or hated Roosevelt
It’s impossible to devise accounting rules that people wouldn’t be able to game. An anecdote from the past: Arthur Andersen couldn’t reconcile Salomon Brother’s accounts and just used a $20mn “plug” to make the balance sheet balance
Politics
The US economic system may be unfair in some aspects but it has been very successful in improving living standards in the US
Nuclear threat has a very low probability, but is real
Berkshire’s executives avoid politics because if you engage in it, you can make many more people permanently mad at you than the number of people you can make temporarily happy
ESG
Some ESG activists asked for a separate meeting before the AGM but were declined: all shareholders must be treated equally
Berkshire fended off all attempts of its shareholders to impose ESG related initiatives like ESG reporting
Managing Berkshire
Berkshire has a culture that works and will be run in the same way after Warren and Charlie leave. There is a risk of someone trying to change it, but protective mechanisms are also in place
Absence of bureaucracy at Berkshire generated a lot of money for the company and made Buffett’s life happier
Buffett and Munger didn’t have a specific plan when they started, just kept putting one foot in front of the other
“It is incredible how many dumb decisions we made”, said Buffett referring to their purchase of department stores and investments in textile businesses. Berkshire has done better with mistakes (learning from them) than with good ideas
Personal advice
Some, like Buffett, are lucky to know what they want to do from early age. E.g. his father was investing, Warren went to NYSE when he was 9, read everything they had about stocks in the library, bought his first stock at 11
Think what is natural for you, what you are good at and what is useful for the society
Even if you are smart, you cannot do well the things that you don’t like
Sometimes it takes years to realize something very important, to have an “aha moment”. When Buffett was 20, he read a paragraph in a book that completely changed his approach to investing. In such moments you often ask yourself: “How could I be so stupid?”
Keep learning - that’s the secret
You can improve decision quality by being multidisciplinary. From time to time you may irritate experts when you talk about their field
If you have a boss, choose one that you admire. Buffett had 4 bosses throughout his career, including Ben Graham, but most of all he enjoys being his own boss