Value Investing

Berkshire Hathaway Meeting 2015 – Not Everything is Gold

The Berkshire Hathaway Meeting 2015 took place recently and readers can find the notes of the meeting here and here. There are many who hang onto every word of Buffett’s. However, the lenses of objectivity have to be applied even to a legend like Buffett. By discussing if every investor should regard himself as a private business owner, we hope to convey why retail investors like you and I should not take everything of Buffett’s at face value.

In response to a question for Munger, whether he tried to talk Buffett out of buying IBM, Buffett added “We have no interest in encouraging other people into buying the investments we own. Why would we want a stock to go up if we’re going to be a buyer next year and the year after that? If we talked our book about our holdings, we’d be saying pessimistic things since our four biggest investments are all buying back stock.”

Berkshire Hathaway Meeting 2015 Should retail investors encourage others into buying their investments?

We do not yet consider the prospect of reinvestment as cited above. Economics dictate that the greater the demand for a product, the higher the price. By this simple virtue, I believe that retail investors should encourage others into buying their investments. Of course, this has to be done objectively and ethically – not as a mere avenue for unloading unwanted investments. This stance differs for professional money managers who collect professional fees from clients. By publicly disclosing and encouraging non-clients into buying their investments, it defies the very purpose of client fees. In order to continue charging fees from their clients, they cannot and should not encourage other people into buying their investments even though they will very much benefit from the price effects of it.

Berkshire Hathaway Meeting 2015 What if we consider the prospect of reinvestment?

Buffett’s main argument against encouraging other people into buying their investments is the prospect of subsequent reinvestments. This logic, when extrapolated to retail investors, implies that we should hope for stock prices of our investment to remain constant, or even decrease. As with most things in investment, it is difficult to give a black and white answer – it definitely does make sense if a retail investor expects the need to deploy substantial capital in the near future. However, in general, I would say that retail investors should not harbor such a mindset (for stock prices to remain constant). Firstly, for most retail investors, the prospect of substantial future capital falling from the sky is highly unlikely. Most retail investors accumulate capital through savings, which is a relatively slow process. Most importantly, Buffet is able to take a majority ownership in most of his investments. The higher the ownership, the larger the extent business returns accrue to the shareholder. He is able to redeploy capital earned from individual businesses to facilitate future returns to the entire holding company. Therefore, his returns from investments has hardly to do with the share price of the company. This cannot be further from the truth for retail investors whose returns are entirely dependent on the share price movements. I am certain that it will be more lucrative for retail investors to have their investments realise their intrinsic value as soon as possible. I am also fairly certain Buffett would want the same as well, should he not be constricted by the mammoth size of capital that he is managing.

To further expound on my argument, it will be useful to understand motives and intentions. I bring this illustration. A private business owner who is taxed based on company earnings would want to minimize reported income and maximize cash flow in order to pay himself more dividends which is tax-exempted. Buffett is very much like this private business owner. On the hand, a public business owner’s remuneration is tied more significantly to the company’s share price. He is more likely to desire a higher reported income as it typically bodes well for the share price.

Berkshire Hathaway Meeting 2015 Final words

Because of a difference in motives and circumstances, not everything mentioned by Buffett will have equal value to retail investors like us. On a tangential note, we have written on how investors should treat themselves as private business owners. However, we are now aware of the nuances involved – it may not be feasible to always fully regard ourselves as private business owners. This case of future reinvestment is one such example. To a large extent, our stand remains unchanged. On a continuum with private and public business owners at both ends, retail investors should still stand closer to, but not fully at, the former.

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Berkshire Hathaway Berkshire Hathaway Meeting 2015
Berkshire Hathaway Meeting 2015 

Berkshire Hathaway Meeting 2015