2023-05-17 16:38:12 ET
Summary
- This article shares 5 important investing themes from Berkshire Hathaway's annual meeting, many of which I think have been undercovered.
- The themes include, the end of the stimulus boom, the relationship between debt, borrowers, lenders, and the Federal Reserve.
- They also include the need for a mutually beneficial relationship between business, society and government, the financial salesmanship paradox, and learning from mistakes while building wisdom over time.
- I include a great deal of my own interpretation and share actionable conclusions when I can.
Introduction
Berkshire Hathaway's annual meeting has come and gone. Nearly every year after the meeting I draft an article containing my thoughts, but usually, I don't publish them publicly. Either they stay in draft form, or I share them in my Investing Group, The Cyclical Investor's Club. The reason why I don't often share my thoughts on Warren Buffett and Berkshire is that they are misunderstood by so many people, I feel it would take a book's worth of writing to correct them all and it becomes too overwhelming of a project to undertake. Additionally, there is some fantastic coverage of Berkshire from SA writers like Jim Sloan, so I'm often not sure how much more my views would add to the discussion. All that said, I have written about Berkshire twice previously in public articles. One was a 2018 article where I explained why I thought Berkshire's stock buybacks were a good idea . And one was part of a roundtable in which I shared my bullish view of Berkshire as my top stock idea at the beginning of 2020:
My favorite idea for 2020 is probably Berkshire Hathaway (BRK.A) (BRK.B). It's one of the few large-cap stocks that's fairly priced that doesn't have problems. It's positioned well to take advantage of a market downturn with its large cash pile, and Buffett is still at the top of his game.
Here is how the Berkshire idea has performed compared to the S&P 500 since the roundtable.
Since Berkshire has continued to sit on about 20% cash, the fact that it is outperforming the S&P 500 is impressive. I threw in an 80/20 target date fund as well just for reference to what might be considered something with a similar volatility/risk profile, which Berkshire has nearly doubled in 3.5 years.
Other than those two articles, I keep most of my thoughts about Buffett, Charlie Munger, and Berkshire to myself. However, since I received several requests for what I thought of the annual meeting, and I think I have some unique views, I decided to write a rather lengthy article about it this year.
Five Important Themes
The initial presentation and Q&A session (which this year I thought was one of the best) is a somewhat difficult structure to write about. Q&A topics vary widely and responses are almost always either very measured or very brief. It's important to remember the goal of Berkshire's Q&A session is to replace the quarterly conference calls most publicly traded businesses participate in. Buffett, as he pointed out at one point during the Q&A, thinks the whole quarterly beating or not beating of analysts' expectations is ridiculous. (And for what it's worth, I agree with him.) But he also understands that actual shareholders deserve to have their questions about Berkshire's business answered. For what it's worth, I think Berkshire's shareholders ask better and harder questions than most sell-side analysts do. There were some very critical questions asked of both Abel and Jain's handling of their respective operating business issues, which I think they answered reasonably well.
Given the wide variety and space between the shareholder questions. I watched the Q&A twice. I took notes on those topics I thought were important, and then afterward placed the topics I thought were notable into five running themes I thought were most interesting or actionable to me. So, I will have a few direct quotes in this article, but there will also be a lot of paraphrasing and interpreting on my part. I admittedly inject a lot of my own personal takes and interpretation on nearly every issue. This will create several levels of discussion. Readers may agree or disagree with Buffett and Munger themselves, or my interpretation of their beliefs and statements, and readers can also agree or disagree with my own framing of various discussions. I am very much aware that my takes and interpretations are unique in many cases, and I welcome a discussion about those in the comment section. I do encourage everyone to watch the Q&A for themselves, perhaps with my interpretation in mind (with which you, may, or may not, agree). Because I prefer actionable articles, when possible, I've also tried to share actions I've taken myself or actions investors might consider, based on my various analyses, so this will hopefully go beyond just a philosophical discussion.
With that, let's get into what I consider the five most important or interesting themes from the annual meeting.
#1: The Stimulus Boom Is Over
In Buffett's opening presentation, he described an "extraordinary period" not seen since WWII as having ended. This boom period end has resulted in some of Berkshire's operating businesses having excess inventory they will likely have to have sales in order to clear. This pattern, which I have termed "boom/bust" in several articles over the past 1.5 years and have warned investors about, is now clearly in the "bust" phase across many publicly traded businesses.
Importantly, this type of "bust", which was caused by massive amounts of one-time stimulus money being pumped into the economy, and then being stopped and spent, is mostly independent of a recession (although one big stimulus regarding student loan repayments being paused is still in effect). So, what we have seen so far with the market decline since the 2021 peaks for most stocks has to do primarily with this stimulus boom/bust dynamic. Despite what some were saying last year at this time, the US hasn't been in a recession. This is important to understand because often a recession is a good time to buy stocks because the valuations are better. I think a recession is still yet to come even if some of the stimulus "bust" has been reflected in some market prices.
Tied to this, in my view, is Buffett's declaration that "Cash is not trash." (For what it's worth, Ray Dalio, whom I believe may be the originator of that phrase, agrees that cash is no longer trash.) At more than one point Buffett demonstrated this by noting he was able to buy some short-term treasury bills with a +5.92% bond equivalent yield. Berkshire now holds over $130 billion in cash.
I think the average investor takeaway from this theme is that now is a good time to hold cash/T-bills and it is not a good time to hold what I term "boom/bust" stocks. Even though I spent a good portion of the past 18 months warning investors about boom/bust stocks and selling the vast majority of mine in early 2022, one that had slipped past my radar that I did not properly categorize and recently sold was Tyson Foods ( TSN ). I bought it on 11/22/21 and mentioned it in at least one Seeking Alpha article. My thesis was that they seemed to have the ability to pass on inflation to consumers and were likely to be able to continue to do so. It turned out that was not the case once stimulus money began to run out, and I took more than a -30% loss on the stock. Here is a FAST Graph that shows the earnings pattern well.
FAST Graphs
The green shaded area represents the earnings per share for Tyson. They had a very good growth year of 47% in 2021, and maintained those earnings in 2022, but once the boom was over, profits fell off a cliff (even more than expected). There are dozens and dozens of stocks with this boom/bust pattern. Many have already fallen a lot, but some have not, and we haven't even had a recession, yet, so these remain a significant danger for investors.
Buffett did not actually predict a recession, though Munger came close with his bearishness on commercial real estate and overall advice that people should lower their expectations going forward if they want to be happy.
I, on the other hand, am willing to take the next step and say investors should also be prepared for a recession. When we combine this with an understanding that "cash is not trash", about 45% of my combined individual investment accounts are currently in iShares Treasury Floating Rate Bond ETF ( TFLO ), and about 70% of our 401k money is in a cash equivalent. The rest is in individual stocks or an S&P 500 index fund, respectively. Most investors should be able to find some short-term interest-rate-paying asset, whether it's CDs or Treasuries, that yields 4%-5%. Given how high market valuations remain, and despite the price rise in a few mega-cap stocks this year, there really is no cost to holding cash and waiting for more attractive valuations in quality businesses if we have an economic slowdown or recession.
#2: Understanding Debt, Borrowers, & Lenders
This was a huge, sprawling topic that covered a variety of questions. I'm going to frame my views and interpretation of Buffett's views with a couple of outside references. First, I suggest reading Buffett's' biography "The Snowball", if you haven't already. That will give you a broad view of Buffett's general take on debt as practiced throughout his life. Aside from that, there was an instance I caught several years ago during the Greek debt crisis where in an interview Buffett shared his thoughts on the EU and the debt crisis, and his response was one of those moments where something really clicked with me about his psychology regarding debt. (I decided to look up the direct quote , and it actually comes from all the way back in June 2012.) Buffett said, the EU "can't be half slave and half free". The implication here is that debtors, particularly those with the massive amount of debt some of the EU countries like Greece had, were essentially the equivalent of "slaves". Rarely have I seen someone as prominent as Buffett frame debt in such stark terms. I never forgot the comment, even more than a decade later, because I believe it so plainly shared Buffett's individual view that too much debt could turn into a form of slavery.
Debt, borrowers, and lenders all came up in various ways at the meeting this year. Notably, Buffett warned against debt for individuals, the one exception being debt for a mortgage (because the terms were in favor of the borrower). So, most debt, in Buffett's eyes, really is a form of slavery that can be difficult to get out of once acquired. Though, around the edges, the terms of the debt matter. Berkshire can borrow Japanese Yen at very low rates for the purpose of buying some Japanese trading companies. Governments, if they are careful, can borrow during extraordinary events like depressions and wars, so long as they return to more fiscally conservative norms after the emergency is over. But ultimately, even with governments, there are limits, and in Buffett and Munger's view, we don't want to get close to those limits. Buffett pointed out in last year's meeting that Berkshire Hathaway Energy is often required to borrow by regulators (I believe to smooth the costs out for customers), but other than a few situations where long-term more durable assets are being funded, Berkshire doesn't use much debt.
Continuing with the theme of properly structured debt around the edges, Buffett talked about banks lending at rates that were too low and taking on deposit risk, while also explaining how Berkshire's float from its insurance companies acts like a bank without the deposit risk. Basically pointing out that insurance float is a reasonable liability to take on if done properly. Banks, on the other hand, are in a situation where no deposits are sticky, noting that the only bank Berkshire owns right now is Bank of America ( BAC ) because he meant to honor an agreement he had with them. Charlie and Warren also pointed out the non-recourse structure of many commercial real estate loans (again, a bad structure for lenders) and how this real estate will probably end up with "a different set of owners". Overall, a very bearish take on banks right now, even if depositors' money is safe.
Bigger picture, as Buffett noted, Berkshire does own the stocks of businesses, like American Express ( AXP ) who are lenders. (Basically, economic slavers if we combine this with his larger view of debtors and lenders.) Lenders are "free" as long as their loans are structured well, and they only lend to credit-worthy borrowers. Generally, I think Buffett accepts the system as it is, and is fully willing to participate in borrowing and lending activities, and leaves it up to the borrowers and lenders to determine whether the structure is beneficial to them. This leaves us with a situation where he warns against taking on consumer debt, even as he lends it out.
We got even more color on this from Buffett when he noted that the Federal Reserve was not the problem (government spending was), adding that a 0% inflation target is better than 2%. "Nobody wants a lot of inflation except someone who has a lot of debts." This is a very, very important thing for nearly everyone to understand, which I have been trying to explain to people for the past two years. Whether or not some inflation is bad (not hyperinflation, but just some single-digit inflation) mostly depends on whether one is a lender or a borrower (and also on the terms). Buffett and Berkshire are net lenders. Treasury bills are loans to the government. So, it benefits Berkshire to have 0% inflation. But there are many people and businesses who are net borrowers. Anyone who owned a home before 2019 with a fixed interest rate mortgage has benefited tremendously from the 15% total inflation we've roughly had since then. Student loan borrowers have already benefited greatly because their loans are fixed and inflation and wages have risen. These two categories alone are nearly $16 trillion in loans. So, if my estimates are close, in real terms, this is a benefit of around $2 trillion in savings for borrowers.
These aren't meant to be normative statements on my part. They are simply meant to be statements of fact that I believe Buffett would agree with overall.
This gets me to the importance of why the Federal Reserve will likely keep interest rates relatively high until inflation comes down. The Federal Reserve is ultimately an institution that operates for the benefit of the banking system and lenders. Their job is to have a situation where lenders can lend out money and have borrowers pay them back that money plus enough interest to cover inflation. In other words, the Fed's job is to produce a system that allows banks to make a real long-term profit in the lending business. As we have seen, banks (assuming they have enough deposits) need to 1) have their principal returned by borrowers, and 2) collect enough interest, at a minimum, to cover inflation. Otherwise, banks cannot make money. It's really very simple. But if there are too many deeply indebted "slaves" in the economy, too many loans can default, and lenders lose money. On the flip side, if there is inflation which is a lot higher than interest rates, the banks can lose that way, too, even if the loans are paid back because the purchasing power of the money decreased while it was loaned out and before it was paid back.
These two ways banks can lose money result in the proxy mandates of the Fed to achieve maximum employment (so people can pay back their loans and pay taxes so the government can pay back its loans) and so-called "price stability" AKA inflation (so lenders don't lose in real terms). In the end, it's all about regulating lenders and borrowers for the benefit of lenders. The Fed only cares about the fate of borrowers if the borrowers become so enslaved they can't pay back what they borrowed and it costs banks and other lenders profits.
So why am I bringing all this up? I think it's important to understand that the Fed will not be lowering interest rates until enough lenders start to experience outsized defaults on their loans. In other words, interest rates will not come down unless lenders start to lose more money due to defaults than they are already losing to inflation. This will be true even if people lose their jobs and unemployment rises because the Fed absolutely does not care about whether people have jobs or not. They only care whether enough loans are being paid back in a timely manner or not. Buffett seems to think that banks are going to have a difficult time managing this process.
After having sold most of my bank stocks by early 2022, I did buy one bank stock after the recent crash, and I've written about a few others I have my eye on if they hit lower prices. But after the Berkshire meeting, I'm questioning whether or not I want to add any additional banks at all during this downturn. It seems to me that even if they thread the economic needle, we could have government and social issues that could slow an eventual recovery. My general takeaway from the meeting is that stocks of lenders should probably be avoided. And paying off any debt one may have at the individual level is smart as well.
If the battle between lenders and borrowers and managing that push and pull seems difficult and tumultuous for society and investors, it is, and will likely continue to be, which brings me to my next topic.
#3: Need for a mutually beneficial relationship between business, governments, and society
In the last two or three Berkshire meetings and annual letters, Buffett has placed a very strong emphasis on Berkshire's relationship with both society and the government. He has pointed out that Berkshire's success has been more dependent on being located in the US, while the United States's success is less dependent on Berkshire. That said, he has also pointed out that Berkshire contributes a lot in the way of taxes to the US, and if there were 1,000 businesses that paid as much as Berkshire, all other Federal taxes could be eliminated. He also inferred during this year's meeting that part of Berkshire's future long-term success will be determined by its ability to be a net benefit to society. I think when one looks at the big picture of both Buffett's and Munger's comments over the years, they both think there need to be mutually beneficial relationships between businesses, governments, and society for civilization to reach its full potential. While I consider this philosophy sort of commonsensical, we see some very sharp contrasts when we observe our current social and political reality.
Buffett took note that political partisanism is increasingly turning to tribalism, and that "Tribalism can turn into mobs." He said we "have to refine our democracy.", but Buffett also thought it's a "better world than we ever had". When it was Munger's turn to speak he said "I'm slightly less optimistic than Warren is."
I share their concerns, yet, at least so far, I'm determined to hold onto my optimism as long as I can. This country has gone through very difficult periods in the past and the US has managed to get through them intact. But the tribalism Buffett notes is getting extreme. I think this is one reason why in recent years Buffett has declined to share many political opinions, even if they are his personal opinions and not Berkshire's, for fear that there could be retribution on Berkshire shareholders from either society or the government. What is happening with Disney ( DIS ) and the Florida government is a good example of this. The entire Disney/Florida issue is absolutely one of the dumbest things I can imagine. But governments do dumb things, and it doesn't make sense to get caught up in something if Berkshire can avoid it, even if it means repressing one's political thoughts. There should be no doubt in anyone's mind that tribalism is causing illiberalism to a degree not experienced in my lifetime. Anyone who has read Shakespeare's " Julius Caesar " has learned that mobs are difficult to manage from moment to moment. Somehow the US has managed to create a media system where mobs can be monetized, so the incentives are not in favor of civilization or businesses right now when a mob could figuratively (or literally) come knocking at the gate essentially at any time for any reason.
I don't know if Berkshire will be able to successfully thread the needle of not enflaming one of these tribes at some point in the future, but I do think they stand a better chance than most businesses, if for no other reason than Buffett and Munger generally only speak publicly two or three times per year.
There were other questions, like those about Artificial Intelligence that touched on some of the persistent social problems that humanity and civilization face. Buffett noted "It could change everything in the world, except for how men behave." while also noting A.I. wouldn't replace the gene. He drew references to the splitting of the atom and our ability to create an atomic bomb. Some things that might be of short-term (and even long-term) benefit to mankind, due to how men behave, could create disastrous results. This struck me as a very cautionary tone, particularly when we have the increase of tribalism we've already noted (tribalism that has spread to global international relations).
In fact, geopolitical risks were enough to cause Buffett to sell a position in Taiwan Semiconductor ( TSM ) even though he had very positive things to say about the business. I believe Berkshire has also lowered its exposure to BYD. This should show investors that if Buffett thinks real risks to a business are high, he will sell, just as he sold airline stocks back in March 2020, and bought back Berkshire stock instead. I've read a lot of criticism of Buffett's decision to do this over the past few years, and now that some time has passed, let's take a look at which has performed better since April 1st, 2020, airlines, or Berkshire.
Berkshire has outperformed all the major US airline stocks and doubled the average returns of the group since it was announced Berkshire sold its stake in them. I already noted earlier how Buffett has sold all his US bank stocks except one. And now we see a similar reduction in China-related positions. For what it's worth, I think investors should take serious note of this. I recently sold all of my Chinese positions due to the same geopolitical risks associated with China. I think this is one of the major takeaways from the meeting.
Munger has been more optimistic about China over the years, and I would consider him a genuine Sinophile. He has expressed understandable disappointment at the failure of both the US and China to cooperate more with one another. I share his disappointment. I was much more optimistic a year or two ago, but we can't let our hopes and optimism cloud our judgment regarding the reality that it is going to be a difficult time for investors, particularly foreign investors, to make outsized gains on investments in China. When it comes to the mutually beneficial relationship between society, government, and business, it seems clear that businesses will be taking a back seat to government and society in China for the foreseeable future.
Munger also noted that the financialization of everything in the US has been a net negative for society. I'll have more to say on this in the next section, but Munger has pointed out many times in the past that society would be better off if many of the really smart people who have been attracted to the financial industry would have worked in other, more useful fields instead. (Warren did point out the hypocrisy of those comments given they work in finance.) I wanted to make sure I noted this in this segment, though, because it does touch on the relationship between incentives put in place by the government, (particularly the tax incentives) along with this optimal balance between business and society with which we might have fallen out of line in the US. Even though I am aware of the potential hypocrisy of agreeing with Munger, I absolutely agree. Personally, I would have much rather worked in a different industry than finance, but much like Buffett, my particular skill set wasn't valued as highly by society as in other fields I was interested in and had talent. What I find particularly annoying is that, in the US, money has an outsized influence on one's power across nearly all aspects of society. When we combine that with the amount of money financial salesmen are able to collect from people, often regardless of investment performance, we have a system where a lot of money is being transferred to wealth managers who aren't very good capital allocators to begin with. Just look at ARK Innovation ETF ( ARKK ) as a prime example.
Now many of these wealth managers are rich, and they can use that money to bend various parts of our society (like the justice system) to their wills in a way that is highly detrimental to society. Not to mention the outsized influence wealthy individuals have on the political system. Taken in isolation, a few of these instances aren't a threat to civilization or capitalism. However, when people earn too much money via their salesmanship rather than producing something of genuine value to society, often these people have an incentive to produce an unfair playing field for others because they know in their hearts they would probably lose should the playing field ever be leveled and their earnings actually based on genuine performance. When enough people are in this situation (as I believe many wealthy people in finance are) it creates all sorts of perverse, and often self-reinforcing incentives across business and government and society at large. So, for what it's worth, I agree with Munger on this one because it throws off the balance of a mutually beneficial relationship between government, society, and business.
#4: The Financial Salesmanship Paradox
Buffett noted in a separate question that learning how people manipulate others, along with resisting the temptation to use those techniques once you learn them, is an important life skill to learn in order to be successful. He emphasized ignoring salespeople. I suspect this is because salespeople have a tendency to lead us to "do dumb things" that are not in our interest. For the average investor, this typically takes the form of buying, or paying too much for, financial products and services that don't benefit the investor over the long term. We are all aware of Buffett's bet during the last decade that hedge funds, minus their fees, would not beat the S&P 500 over that decade. Buffett, of course, won that bet.
While I think the "doing dumb things" lesson can be applied broadly, Buffett's quote was actually in reference to Berkshire's historical outperformance being tied to other businesses and people "doing dumb things" by getting into situations where they are willing to sell assets for significantly less than those assets are worth over the long term. Buffett was fairly confident that Berkshire would be able to capitalize on others' mistakes because most businesses were focused on very short-term results in relation to market expectations while many money managers were more successful as salespeople than they were as capital allocators. Buffett said: "The world is overwhelmingly short-term focused." "The big money is in selling other people ideas. It isn't in outperforming." Munger was less optimistic about really good opportunities coming about. "There is so much money now in the hands of so many smart people, all trying to outsmart one another and out-promote one another at getting money out of other people. It's a radically different world than the one we started in." (Presumably when there weren't so many smart people looking for deals in the market.)
I think both Buffett and Munger are probably right to some degree. There are opportunities in the market, especially if you can buy stocks that are a little smaller and not in the media spotlight, and especially if you are prepared to act quickly when buying, and then hold for five years or more. Many of these opportunities are too small for Berkshire, though. I think the biggest takeaway here is that it's dumb to focus on meeting or beating short-term earnings expectations, and the investors who are doing that will eventually create opportunities for those who focus on longer-term business prospects. Combining this with the ability to ignore financial salespeople can produce good results for investors.
There is obviously a paradox here in that people like myself, Buffett , and Munger, are part of this financial system. We have to "sell" to some degree. Berkshire's annual meeting itself is at least partially a sales pitch to shareholders of Berkshire's ongoing value. I run an investing group and earn money from writing about stocks and developing investment strategies and tools. In order to get my work seen, I have to participate in the system. Unless a person starts out rich in this business (which I did not) they need to at least let potential investors know they exist in a world where there are many wealthy salespeople. The key differentiating factor that Buffett pointed out, is that most salespeople in the financial industry are not focused on long-term performance. In fact, I think salespeople will often try to get investors to focus on anything else other than performance, like, for example; a promising technology that will change the world like the internet, mobile internet, crypto, self-driving cars, artificial intelligence, biotech, streaming video, a new emerging market, and generally whatever "the next big thing" is. There will also be new, or freshly-promoted, financial services being sold like tokens, options trading, thematic ETFs, target date funds, and many more. But I've found the most insidious sales pitches almost always involve "safety", which disastrously promoted things like a 60/40 portfolio regardless of how overvalued the bonds were, along with current dividend and consumer staple stocks that are dramatically overvalued, but perceived as "safe" because the businesses are unlikely to collapse and often have a long record of paying dividends. In terms of the total amount of money lost by investors, my observation is it's actually the "safe" investments that tend to cause the most losses for investors, allowing the financial industry to collect the easiest money, via steady fees. At the other end, "gambling parlors" as Munger has called them, which focus on getting rich quick, usually fail in short order, and often in dramatic fashion.
What makes the paradox so difficult for everyone is that if a money manager does produce a very good long-term return record, thereby proving that their talent is legitimate, even net of fees, it will attract people who will study and learn what they are doing and try to do the same. So, any successful formula for stock investing, once discovered, will go away. That means investors who wish to achieve better-than-average returns will have to make at least some changes along the way or use a system that isn't formulaic. What this does is create a situation where perhaps every 10 or 20 years (which is the minimum time frame it might take to establish a credible investment return record) the manager will need to change, at least somewhat, to account for others who are adopting a similar approach and taking away opportunities that might have previously been more readily available. And the new, changed approach, will then not have such a long record of success.
These dual paradoxes of salesmanship and long-term performance make it extremely difficult for the average investor to be able to select a money manager or an investment philosophy and stick with them. I don't have an easy answer for these paradoxes. My best advice would be to avoid strategies and managers who don't at least try to measure their medium-term 5-year+ results on both an absolute and relative basis versus the S&P 500 and/or a 60/40 portfolio. I think it's always wise to measure one's results against Berkshire Hathaway stock itself (which is something I do). If a manager or strategy is promoting some other benefit (like steady income, or lower volatility) I would be very skeptical of such managers and strategies because they are taking one's eye away from the ball, which is always long-term total returns at the portfolio level. Berkshire's annual letter always starts with its long-term historical performance compared to the S&P 500 because that tells the story that matters most for investors. Buffett doesn't charge any fees to own Berkshire stock either, so that shouldn't be an issue.
While there are challenges to performance tracking, I think one potential antidote to salesmanship that was touched on was teaching. While Buffett's ability to teach is limited to some degree because he works in a competitive field of money management and can't divulge his secrets for reasons I have noted earlier, he has stated in the past that he wants to be known primarily as a teacher. We got a good sense of how all this ties together during Buffett and Munger's exchange about Ben Graham. Graham was Buffett's most important investing mentor and teacher, and he noted how Graham's book, which I believe was published in 1949, has continued to be relevant through today, consistently ranking near the top in sales on Amazon. Graham's teachings fundamentally changed how Buffett went about investing during his college years and contributed to much of his success.
Munger pointed out that despite Graham's influence and success, over 50% of Graham's lifetime gains ultimately came from one stock, GEICO. (Notably, Graham generally had a very different, unconcentrated, higher turnover approach than Munger, who prefers big, concentrated bets and long holding periods.) Buffett replied to Munger basically by saying if an investor has a solid process and they stay in the game, it puts them in a position to experience the sort of "lollapalooza" success Graham had with GEICO. I think this is very true, and a very important takeaway for investors. The temptation for many investors who read about Munger's concentrated approach (one which I, at one point, subscribed to, but no longer do) is to adopt a concentrated investing approach without having anywhere near the talent and experience Munger has. It sets concentrated investors up for potential disaster and they can largely be taken out of the game with one or two bad or unlucky investments. A more humble approach is the unconcentrated approach, but one in which winners are allowed to run. This approach (which is essentially what happened with Graham and GEICO) doesn't rebalance a portfolio for the sake of maintaining diversification, so it can allow an investment to grow to 50% of one's portfolio. Instead of starting with a concentrated position and hoping to get rich, it lets the best businesses become concentrated over time based on their own merit. I prefer this approach because it gives time for the investor to learn and improve over time, and is far less risky for those investors who aren't as smart as Munger, without really sacrificing too much opportunity. One's odds of finding big long-term winners are also better the more stocks one buys if they have a reasonably good investing process in place.
I have found it useful to compare the behavior of other investors and businesses to Buffett and Berkshire to see what really makes sense. Berkshire has shown that many practices taken for granted in the financial industry are not necessary because Berkshire doesn't do them and has been successful. Businesses don't need to pay a dividend to be successful. They don't need stock options. They don't usually need massive amounts of debt. They don't need excessive executive pay. They don't need to obsess over their stock prices and quarterly expectations. So, when you see mature businesses that shouldn't really need capital markets much for anything obsessing over these things, it should raise some red flags among investors. Good businesses that are working for the benefit of shareholders' long-term interests as Berkshire does, really shouldn't need to bend to the will of Wall Street much once they are consistently growing earnings, especially if they are paying a dividend. It's often through our ability to observe Berkshire's structure and behavior that Buffett lives up to his goal of being known as a teacher. Berkshire avoids many of the bad practices many other businesses pretend are necessary.
#5: Learning From Mistakes & Understanding Consumer Behavior
One of my favorite themes that mostly operated as an undercurrent at this year's meeting was that of learning from one's mistakes, and generally growing wiser as time goes on. For example, Buffett described the one time Berkshire paid a small dividend back in 1967 as a "terrible mistake". This is important, not only because there are a lot of people who constantly proclaim that Berkshire should pay a dividend, but because it shows at some point between 1967 and today, Buffett unequivocally changed his mind about the appropriateness of paying a dividend. I think part of that change of mind had to do with Berkshire changing into a conglomerate structure so they could essentially always find a way to allocate capital better than almost anyone that would have received a Berkshire dividend could do.
If we look at a single focused business, like, say, See's Candy, or any business like it that has essentially filled its addressable market, it makes sense for them to pay a dividend. (They might indeed be paying a dividend to Berkshire as high as 20%.) That is because Berkshire can take that money and hopefully over time find someplace to invest it where the returns can grow over time. In the late 1960s, Buffett was investing much more like the Ben Graham style than he does now, and it's possible there just weren't many deals like that around anymore. Once Buffett adapted his investing approach and became more long-term oriented and Berkshire evolved into a bigger conglomerate structure, more investment opportunities opened up for him in the decades that followed. Not only did Buffett understand the mistake of paying the dividend, but he also showed that he could adapt to the market as it changed.
This is something I try to emulate as much as I can by looking at potential holes in my portfolio of investments and then exploring if I can develop a good strategy that can successfully fill those holes and find new opportunities. I have developed all of my own investment strategies, usually following some mistake I've made or some opportunity I missed. Now that I have several good strategies, I can usually find some opportunities in most markets. Before, when I only had one or two strategies, the universe of stocks I could successfully invest in was much more limited.
If you make a mistake and survive, usually there is a learning opportunity in it. Buffett noted that he had as much fun with the deals that didn't work out as he did with the ones that did. Perhaps some of this is in hindsight, but I know I'm grateful for at least some of the mistakes I made because they drove certain lessons in deeper and caused me to make changes to my process that led to me becoming a better investor over time. Buffett made a comparison to golf, and that it wouldn't be much fun if you could hit a hole-in-one on every stroke. Part of the challenge of investing is that it is indeed very difficult to get above-average returns over the long term. The benefit is that if an investor manages to do so, it is that much more rewarding.
Along the same lines as this continual learning process, Buffett noted that he and Munger, after many decades, have learned a lot about consumer behavior. The implication was that while he might not always understand the technology and the mechanics of the delivery of goods and services (like the internal workings of an iPhone, for example) he does have a very good understanding of consumer behavior along with the numbers of the business. Buffett essentially pointed out that for many people an iPhone was more useful than a second car, but costs considerably less money. This sort of framing comes easier when one has decades of experience observing consumers and picking out what trends are more sustainable long-term (and, importantly, also identifying those that are unlikely to be sustainable).
Buffett also made some comments on Occidental Petroleum ( OXY ) that I found interesting. Apparently, there were people who thought Berkshire would buy OXY's entire business (I'm not sure why they would think that Buffett would wait so long to do so if it was his intention, but that's a different topic.) It became apparent a few years ago once it was clear the economy would recover from the COVID shutdowns, that Buffett was pretty bullish on sustained demand for oil. While it's open to interpretation, Buffett has sort of made the case that OXY largely controlled its own destiny because they can control how much they drill. While it wasn't clearly stated, I got the sense that OXY could make the necessary cap-ex adjustments based on the oil price due to the short-term nature of their wells. But the most interesting thing Buffett said was "OXY has some other things, too" and "A lot of good things". My theory is that there is a potential play on two things down the road, one is perhaps the development of some new technology that might allow them to retrieve more oil out of wells. The other, which is a theory I've had since Buffett started buying OXY, is that OXY is developing carbon capture technology that will essentially allow it to sell carbon-neutral oil, which might be able to demand a higher price than traditional oil. These are both speculative on my part, but usually, Buffett invests in such a way that he likes to have his capital returned to him, or earned back by the business, quickly (almost always in less than a decade), and he also likes to have an option for future growth (sometimes taking the form of warrants). It's okay if the future growth potential is a little speculative, as long as the initial capital return is fast, and highly likely to occur. These references to "other things", I believe are a reference to some future untapped potential for OXY. Time will tell. I do have OXY on my radar as a future purchase if the price of the stock falls some more.
The main takeaway here is that mistakes are a part of this process we should sort of accept and embrace and learn from, as long as they aren't so bad we are taken out of the game. It can be tempting to try to forget our mistakes, but I've found it's much more useful to examine them closely. Sometimes, it is indeed bad luck that causes a major investment loss, but most of the time investors can find improvements to their process if they closely reflect on their mistakes. Additionally, understanding basic human behavior as it really is, and not how we wish it to be, is important as well. While it helps to have lived and experienced consumer behavior over several decades as Buffett and Munger have, I think reading and understanding history can teach a lot in this regard as well.
Conclusion
I've read a lot of misguided comments about Berkshire and Buffett over the years, and there are days it takes a lot of willpower not to respond to them because many are so far off base. If I could offer one piece of advice to investors and readers following Berkshire, Buffett, and Munger, it is to first assume they are probably right about pretty much everything and it's you who is lacking some knowledge or understanding. Then, after careful consideration, study, and reflection, perhaps you can identify some small errors in their judgment about investing, or ways in which your situation differs from theirs.
There is a lot investors can learn from Berkshire's annual meeting, but they need to be able to listen and reflect on those lessons. As one grows as an investor, one will notice different things, sometimes perhaps deeper things, that often aren't reported in the media headlines. I've tried to share a few of those in this article, really just to share what I personally thought about and reflected on this year.
For further details see:
Buffett's Q&A: 5 Unique And Important Investing Themes From Berkshire's Annual Meeting