After many years of wishful thinking (and with time running out) in late April my father Richard and I made the trip from Perth, Western Australia to Omaha, Nebraska in the United States for the Annual General Meeting (AGM) of Berkshire Hathaway (Berkshire). Held over the first weekend of May it incorporated a series of shareholder events.
Berkshire is a multinational conglomerate holding company valued in excess of US$325 billion based in Omaha, and is led by the world famous investor Warren Buffett (Berkshire’s Chairman and CEO) and his lieutenant Charlie Munger (Berkshire’s Vice Chairman). Whilst impossible to quantify Buffet believes the company has approximately 1 million shareholders. Given the diversity and size of Berkshire’s operations in many ways it acts as a proxy for the broader US economy.
The Berkshire AGM has become somewhat of an annual pilgrimage for investors around the world ranging from young investment hopefuls to multi-billion-dollar portfolio managers. Such is the popularity of the event it is now attended by around 40,000 people and has earned the nickname the ‘Woodstock of Capitalism’. The meteoric rise in popularity of this event is unsurprising given Berkshire’s remarkable performance over the last 50 years having recorded negative returns only twice since 1965, with one of those down years recorded in 2008 during the height of the Global Financial Crisis. To put that in perspective in the same time period (1965 – 2014) the S&P 500 has recorded 11 separate years of negative returns. The incredible performance of Berkshire has been largely attributed to the value investing philosophy of Buffett who has achieved rock star status in the investing world earning nicknames such as the ‘Oracle of Omaha’ or the ‘Sage of Omaha’.
Omaha may be in the middle of a great prairie but its wealth is visible. Although sleek, modest office towers make up the small central business district it should be remembered that Omaha’s background has been that of agriculture. Nevertheless without Buffet and some college baseball Omaha would remain very obscure (ironically this is precisely why Berkshire remains located well away from Wall Street).
The Buffett brand transcends investment circles because, as well as his enormous riches, there’s his folksy wit and humble lifestyle. At a time when Americans are growing increasingly resentful towards the wealthiest ‘one per cent’, the man who represents the smallest fraction is cherished by most as a wholesome symbol of the ultimate American dream.
As we landed at the somewhat basic and remote airport we noticed a few of the scheduled 150 private jets arriving carrying shareholders from all over the world.
After dinner with our most hospitable American friends on Thursday we spent Friday touring Omaha including a visit to the Berkshire-owned Nebraska FurnitureMart which is about 10 times the size of a typical Harvey Norman store in Australia. We also took the opportunity to attend the shareholder-only Borsheims Cocktail Reception with some other Australian fund managers that evening.
Post a 4am wakeup on the Saturday we lined up at 6am in the cold at the CenturyLink Centre (at which point there were over 6,000 people already in the queue). We finally found seats in the second tier around 7:15am after participating in the running of the bulls: middle-aged men holding their glasses on their noses as they charge for the best seats. Excessive seat reserving was rife and something we had to learn about the hard way. Soon enough we were joined by a couple of old-timers who we regular attendees and it became evident that these gents held 10 A Class shares each (which at last quote are worth US$203,000 each) after investing some decades ago. These guys were huge devotees to the Sage.
The media – arriving from Tel Aviv, Tokyo and everywhere in between were seated high up in the skybox with a view of the entire stadium.
Underneath the stadium is an exhibition centre which housed displays from more than 40 Berkshire subsidiaries promoting their products – ranging from Heinz ketchup, mobile homes, Coca-Cola, BNSF Railway Co, clothing, boots, mattresses (including a pillow-top style named ‘the Warren’), and confectionary. Borsheims (the jewellery company) was offering 25 limited edition 18-carat white gold necklaces with a half-carat diamond (featuring an etching of Buffett’s signature) at US$1,750 each. We didn’t get one of these but did manage to pick up some commemorative socks and t-shirts before the meeting started. Buffett later advised that total sales for the vendors exceeded US$40m for the day.
The meeting officially began with a movie which included a duet of ‘My Way’ with Paul Anchor and a clever sketch by the actors in the HBO television series “Entourage” in which Ari Gold (Jeremy Piven) was attempting to convince Vincent Chase (Adrian Grenier) to accept an offer to play Warren Buffett in a biopic about his life. After the movie official proceedings began with a five hour Q&A session with both Warren and Charlie who were both as sharp and humorous as ever. Questions came from journalists, analysts, and shareholders throughout the stadium which was almost the size of Subiaco Oval. Both Warren and Charlie discussed a variety of issues from the performance, management style, and diversity of Berkshire, their rationale for always holding at least US$20 billion in cash (as at 30 June 2014 it stands at US$55 billion – credit is like oxygen), to broader issues such as the current state of the US economy and the effect Barack Obama’s presidency has had on America’s economic prospects. Warren enjoyed numerous Coca-Cola products throughout the day (so much for concerns over the sugar content).
With Bill Gates and the other board members in attendance it was quite a sight as we pondered the collective net worth of the attendees and power of capitalism in the Land of the Free.
By following the principles of value investing and basic common sense Buffett and Munger clearly have the ability to find businesses that make money and they know how to direct that cash within their own vast empire of businesses, from candy makers to railroad operators. Our challenge was to absorb the lessons and insight then bring this home and apply it to enhance the way we manage money for our clients.
As the AGM drew to a close we headed out to dinner Gorat’s steakhouse (on Warren’s recommendation) and then returned to the Old Market District for a nightcap.
On Sunday we toured Omaha and attended a college baseball game (yes I should have done the Fun Run instead) before dinner with other AGM attendees. Each event provided an unrivalled networking opportunity to meet like-minded retail investors, fund managers, and executives from around the world some of which are managing many billions of dollars. I would strongly encourage others who are interested to attend – it is an eye-opener to say the least and it was clearer than ever to us that Australia remains a microcosm of the global economy with a very limited investment universe. Buffett is a showman as much as an investor, and with our Australian tall-poppy syndrome it is unlikely such an event will ever occur domestically.
Some of the Key Messages Delivered
On ‘Cost of Capital’:
Cost of capital is stupid – Both Buffett and Munger agreed that the term ‘cost of capital’ is an abstract concept that is often used by CEO’s and CFO’s to justify investments or acquisitions (i.e. ‘We think this is ‘accretive’ because the returns exceed our ‘cost of capital’). Buffett said he has sat in on thousands of these types of discussions where ‘the CEO has no idea what his cost of capital I’ and ‘I don’t have any idea of what his cost of capital is either’.
Buffett and Munger had a much better way to view cost of capital that I thought was much simpler. ‘Cost of capital is what could be produced by our 2nd best idea and our best idea has to beat it’. Buffett went on to say that the ‘deal test is whether $1 we retain produces more than $1 in market value… not ‘cost of capital’.
Buffett said that they are ‘always thinking in terms of opportunity costs’. Thinking in this manner, rather than some model that can be manipulated in a spreadsheet, is a much more productive way to analyse investment opportunities within a business. Munger once used this idea when referring to stock investments in general. He basically said that whenever they were looking at a stock, he would compare it to Wells Fargo. His thought process was: if it’s not a better value than Wells Fargo, then just buy more Wells Fargo.
On Circle of Competence:
‘If you just keep learning things, eventually something will work.’
This was a classic Buffett teaching moment. He basically said that to develop a circle of competence he would do the same thing that he did when he was 23. He said he would look at lots of companies to learn about them. He said that if he wanted to learn something about the coal industry, he would go around and talk to eight or nine coal executives, and ask them about their business models and their competitors. He implied that one can achieve an enormous amount of knowledge by talking to management and people who understand the industry better than you do.
On Conglomerates and General Investments:
‘It’s not a bad business plan to own a bunch of great businesses.’
The question was related to conglomerates but Buffett and Munger used it as a way to espouse some of their general wisdom on investing in general. They started by saying that most conglomerates fail because of financial engineering (issuing stock at 20x to buy at 10x—Buffett likened this process to a chain letter). This practice doesn’t create long term value. The key is to buy great businesses and focus on earning power, not engage in financial engineering.
Keys to successful conglomerates (picture Wesfarmers Ltd):
- Common sense business principles
- Good capital allocation
- Focus on earning power, not stock promotion (issuing stock to make investments)
Buffett said that ‘our goal is to buy really good businesses that can grow over time and that have great managers’. Charlie added that there are two main differences between Berkshire and the failed conglomerates:
- We can buy stocks
- We don’t feel the need to always be doing something
This last point is underrated. Berkshire doesn’t have to deal with investors who have specific time frames (thus demanding shorter term results). They can sit on piles of cash as long as they want and wait for the proverbial ‘fat pitch’. This is incredibly valuable when things become distressed.
On Identifying Winning Businesses in ‘Disruptive’ Times:
‘We stick to businesses where we can identify the winners’. Buffett discussed his classic and simple idea that he likes to look for businesses where he can imagine the earnings being much higher 10 years from now.
He and Munger try to stick to businesses that have slow changing characteristics (likely will be providing the same basic product or service in 10 years that they are currently providing). He mentions that all businesses go through changes, but he tries to invest in ones where change is happening slowly and over time.
There were many other interesting topics broached during the Q&A session. One book worth sourcing is ‘Dream Big’ by Cristiane Correa, which is about Jorge Paulo Lemann and 3G Capital, the firm Berkshire partnered with to buy Heinz. Buffett spoke very highly (and very often) about 3G and how he believes they are incredibly talented managers.
Buy Berkshire – Over the course of the meeting, Buffett made a convincing case that he has thought through the issue of his eventual departure with as much or more care than any investing problem he’s ever tackled, and that he truly believes Berkshire will stay Berkshire after he’s gone. He expects that whoever replaces him ‘will have their own Munger’ and a ‘Dynamic Duo’ is a good approach to take.
Interestingly Buffet also mentioned that the point where Berkshire is generating more cash than it can intelligently deploy is not on a distant horizon (equally it is not imminent). At this stage a share buyback of significant size is highly likely.