This is my notes and observation from my recent trip to Omaha for the 2016 Berkshire Hathaway Meeting. You can also read a copy on my blog at brianlangis.com
As you know every mother in this country tells her daughter at an early age: if you're choosing between two very old and rich guys pick the one that's older — 85 year-old Warren Buffett poking fun at partner Charlie Munger, who is 92, as to why he can get the girl more often.
For the second year in a row I had the privilege of attending the Berkshire Hathaway (BRK) Annual General Meeting (AGM). BRK has been one of the most lucrative investments in the last forty years. Listening to Warren Buffett and Charlie Munger taking questions from journalists, analysts, and shareholders for nearly six hours is a very enriching experience. You also get to see them eat See's Candies peanut brittle and drink Cherry Coke out of a wine glass the whole time. That's what I call product placement. In his opening statement Buffett didn't hesitate reminding everyone that he was the young one. You learn a lot from listening to successful old wise men.
This year was BRK 51st AGM under Warren and Charlie and the first time it was broadcasted via live streaming online for the world to watch. That was a wise decision considering that the event has become huge success. When 45,000 descend on Omaha, it's definitely noticed. The more money Buffett made, the bigger it got. Success attracts success as they say. People who asked me why do you bother going if the meeting is streamed online? Well part of the answer is that I booked my plane ticket and hotel before BRK announced the change, but there's also a real reason. The most interesting aspects of making the trip are the extraordinary people you meet and the associated events. There are investments panels, breakfasts, cocktails, dinners, conferences, presentations and various networking events that you can attend. Since this is my second year, you gain a sense on how to better allocate your time.
You don't go to the AGM because you expect Buffett or Munger to say something new or some kind of magic investment formula. They won't. They will say the same thing you read in the shareholder letters or past interviews. That seems to disappoint some people. But it's crazy to think they were going to say something totally new or shocking. That's not what made them successful in the first place. They are consistent and disciplined in their approach. As they themselves mentioned at the meeting, you don't go to church to hear something new; you go to church to hear the old things harped on again and again. Munger and Buffett are teachers are heart. They also made their playbook available.?
You can still watch the AGM with the recording available until May 29th available @https://finance.yahoo.com/brklivestream. The meeting Q&A was being simultaneously translated into Mandarin. China's interest in Buffett and Berkshire is border line fanatics. I don't exactly know why since China has its own multi-billionaires and successful business people. I don't see any Americans being fascinated with Chinese billionaires.
By the way you don't need to be a shareholder to attend the AGM. You do need credentials that you can buy for $5 on Ebay. Every shareholder is entitled to 4 credentials so there are plenty of extras available. Some folks decided to sell the extras for $40 or more on Ebay. BRK didn't like that and decided to by-pass sellers by flooding Ebay with $5 credentials. This reminds me of the tactic BRK employed against funds pooling money in the 90s to buy the expensive Class A share for a fee. That led BRK to create the popular Class B share to anyone who wanted it. Since its creation the Class B has spitted to make it possible for the mom and pop investor to invest along Buffett. The Class B share is now worth 1/1500 the price of a Class A shares. One Class A share cost $210,000 and one Class B cost $140.
I arrived in Omaha around midnight Thursday night. You know you are on the right plane when everyone on it is reading a Buffett book or a shareholder letter. My connection for Omaha left from NYC and I wonder if NYC has direct flights to Omaha any other time of the year.
Friday was filled with the Farnham Street breakfast, a visit to the exhibition hall, eating Dairy Queen, Creighton's University Value Investing panel, and Whitney's Tilson cocktail. It was funny how a lot of people at Whitney's cocktail didn't know who he was but if you mentioned he was the guy from 60 Minutes that famously shorted Lumber Liquidator they were all like “oh yeah I know that guy”.
This year I had the pleasure of chatting with one of Berkshire Hathaway's investment managers, Todd Cobbs and Board of Director member Meryl Witmer. They are both really interesting gave me insights on Buffett and the BRK culture. Warren Buffett also dropped by the exhibition hall Friday to visit the booths and to take pictures. At the speed his walking and moving around there's no way he's 85 years
Saturday was the BRK meeting and this year I decided to show up a little later around 5am in the morning instead of 4am last year. As a second year veteran, you know which doors are faster than the others. Getting there super early in the morning looks like a freakish thing to do but it goes by really fast since you mingle with the crowd the whole time.
Security was boosted a couple levels this year. There were a lot of security guards in the crowd and for the first time you had to go through a metal detector and get your bag checked. It did slow down entering the building but security was much faster than the TSA. I wonder if this has to do with the multiple death threats on Bill Gates and Warren's head by ISIS and Al Qaeda. Not sure what they have against Bill Gates, he was there Saturday morning at the newspaper throwing contest and I was impress at how humble and nice he was. Mr. Gates also had to pay for Warren's dilly bar since Warren didn't have any money on him (Warren owes a $1 to Bill).
The meeting always start with an opening film that wasn't streamed to the world and I highly doubt you will find a copy on the Internet. They have a very strict no filming policy. The movie is one of the best parts of the meeting. The short movie (~45min) contains a lot of celebrities who have volunteered their time and Warren Buffett promised them he wouldn't make money off it. The film is a collection of short clips and skits featuring humor. Last year final's scene starred Warren Buffett getting ready to fight Floyd Mayweather and this year it featured Arnold Schwarzenegger as the new host of the Celebrity Apprentice. Arnold had to deal with Warren and Charlie (labeled the other terminator). In real life Warren Buffett will not be a contestant but will act as an advisor to Arnold once the show is aired.
BRK outperformed the market by maintaining a disciplined approach. Sure the marketing irrational exuberance will occasionally outpaced BRK in the short-run, like during the tech bubble of the late 1990s; he knows he has the winning strategy for the long run. Even the best investments will endure extended periods where their strategies simply don't perform. When you try to outthink and over trade the market, you often do more harm than good. Whatever strategy you chose, the key is to find something that works and follow it through the inevitable ups and down. This will most likely improve your odds of investment success.
From 1965 through the end of last year, Berkshire shares have risen 1,598,284%, compared to the 11,355% return on the S&P 500. $1,000 with Buffett 51 years ago would be $15.3 million today. But it's going to be hard to move the needle that fast from here. Because of size, it's getting harder and harder to make to grow at a fast pace. But the amount of money they make is just monstrous. BRK is sitting of $58.3 billion at the end of March and is looking to make another big acquisition. of the question during the meeting was about the companies Mr. Buffett likes to buy, noting that they have changed from companies that throw off plenty of capital to ones that are far more capital intensive (e.g. Berkshire Hathaway Energy, BNSF, PCC etc…) Buffett said it's a problem of prosperity and the ideal business is one that takes no capital” but still grows. But most of those are not of a size that they would move the needle at Berkshire. When Berkshire was smaller, See's Candies was one that fit the bill.
Below are some notes, thoughts, lessons, and highlights of the BRK weekend:
Exhibition Hall
The Friday visit to exhibition hall is one of my favorite things during the weekend. The exhibition hall is where BRK has multiple companies on display that you can visit and shop. There are shareholder discounts on many items and it's hard to turn down a $2 Dairy Queen vanilla Oreo blizzard and $1 Dilly bar. I like the place because it allows me to visit different companies from different industries and to talk to many executives. These people clearly love what they do and they love talking about their company.
The latest new baby to the Berkshire family is Precision Castparts Corp. (PCC). This baby is big since it was BRK's largest acquisition ever at over $32 billion. PCC is a manufacturer of complex metal components and products. You couldn't miss this baby once you entered the exhibition hall. Their booth and their nice products was the first thing you saw when you entered the exhibition hall. PCC had a lot of staff on hand to answer questions and their product is state of the art stuff. With few exceptions, every aircraft in the sky flies with parts made by PCC. I was surprised of their presence since the deal recently closed at the end of January.
Clayton Homes, the largest manufacturer of modular and mobile homes, made an impressive display with a 3 bed, 2 bath, and 1,475 sq. ft. for only $78,900. Most major appliances are included too. You just need to provide a piece of land. For $80k, this is a really nice home. So why is it so cheap? Well Clayton is able to get a volume discount on material since they build 35,000 homes a year. The other trick is that they don't have any waste. The pic below of the two bins is the only waste left once Clayton finished a home. They don't waste anything!
Below are pictures of the $78,900 home “The Patriot” that was on display:
One of the most notable absences is IBM and Watson. Not that I cared. Last year IBM had one of the high quality corner spot when you walked in. I guess Warren didn't want to remind anybody of his puzzling tech bet on IBM that's not going too well (at the time of this writing, BRK just disclosed a position in Apple made by his portfolio managers and they are bankrolling a bid to buy Yahoo, is Warren finally embracing technology?). As for IBM, BRK now owns over 8% of the company. I also didn't see Wells-Fargo and its lifestage carousel.
More than a year since the Burger King and Tim Hortons highly mediatized merger I would have expected a BRK/Tim Hortons booth but they weren't there. I wonder if this is because of the ill feelings that might remain from the take over and tax aversion tactics employed by 3G Capital in the acquisition. Even though Warren and Charlie has been praising 3G Capital's management style, the Burger King-Tim Hortons merger as hit a nerve with shareholders last year. A lot of shareholders are uncomfortable with the BRK/3G partnership. 3G has been associated with job slashing and efficiency which seems to contrast with Buffett's nice folky reputation. But I'm only speculating as to the reasons why BK-Tim Hortons wasn't there. The Kraft Heinz Company, another deal backed by 3G, was present with an Oscar Mayer wienermobile and the place was packed. Berkshire's stake in Restaurant Brands International, the owner of BK and Tim Hortons, is only ~4.2%, so it might not be significant enough to have a booth (although they financed part of the deal with $3 billion in preferred shares that pays 9%!).
On Berkshire Hathaway's Credit Rating
When asked why Berkshire's credit rating is not AAA, Munger pounded on that question right away. He bluntly said that credit agencies were wrong. Standard & Poor's gives BRK a AA+. It has been downgraded since 2009, when it used to be AAA.
Markel Corp.
For the second year in a row, I preferred the Markel Corp. (MKL) Sunday morning brunch and not just because the breakfast is far better than the BRK one. Markel is dubbed the “mini-Berkshire” and is a successful BRK clone. It's a conglomerate that uses its insurance float to invest that's compounding the gains. Steve Markel and Tom Gayner are the Warren Buffett and Charlie Munger of the company. In the last couple years Markel has been on fire and I regrettably don't own a single share. MKL trades at $950 per share. It was less than half of that when I started following the company.
Is it a fair to compare the MKL to BRK? While BRK fills the CenturyLink center, MKL host their meeting at the hotel across the street with a few hundred people. It's like comparing a sold-out Bon Jovi concert at the Madison Square Garden vs the up and coming band at your local theater. You can't touch Bon Jovi but you can have a beer with the up and coming band. I prefer the MKL meeting because 1) its smaller, 2) the executives are approachable while Charlie and Warren, and 3) I learn a lot more.
I find the questions and answer with Tom and Steve more pertinent and practical. Tom and Steve don't mind getting technical while Charlie and Warren avoid getting into details. Warren's answers can be long and vague that I sometime forget what the question was. The true is that BRK is a victim of their own success. I'm not saying that Warren's answers are not pertinent because they are. It's one of the reasons why people make the trip. But the crowd and make-up of the questions is different. I think the MKL meeting attracts more of a crowd of sophisticated investors which allows Tom and Steve to get into specifics while the BRK meeting is more entertaining with a movie and jokes. This was the first question from a shareholder at the BRK meeting: “What would you have done differently in life in your search for happiness?” while one of the questions at the MKL meeting at to do with return on equity. These sorts of inquiries are the reason that the Berkshire moved a few years ago to have journalists and analysts ask some of the questions. The MKL meeting is probably what the BRK meeting looked like in the early years. BRK use to have its meeting in a cafeteria, imagine that. Just like its stock price, MKL's meeting is growing every year. They will have to upgrade soon to a much bigger room.
Coca-Cola
Every year there is a question regarding BRK's investment in Coca-Cola meanwhile more than one in three American is obese, with consumption of sugar-sweetened beverages such as Coke a contributing factor. Every year the question seems to get tougher. Last year Buffett answered with a non-answer, stating his own personal consumption of Coca-Cola (he's 1/3 made out of Coke he said) in validating his investment. This year, journalist Andrew Ross Sorkin's question was more pointed. He asked Buffett not to bring up his personal consumption habit of Coca-Cola when asked “why Berkshire shareholders should be proud to own Coke?” Well Buffett ignored the directive and started talking about his own personal consumption habit. He said he has not seen evidence that convinces him that he will make it to 100 if he suddenly switches to water and broccoli. He also continued that because there are so many more women who live to 100 than men, if you really wanted to improve your longevity prospects, for a guy in his position, you have a sex change. Munger didn't like the question because it ignores the benefits of soft drink, which are made mostly of water that people need to survive. In general, Munger said citing the disadvantages of something without taking the advantages into account are “immature and stupid”.
Hedge Fund Rant
In 2008 Buffett made a very public bet with a hedge fund called Protégé Partners. The bet was that a group of five hedge funds picked by Protégé wouldn't be able to beat a simple S&P 500 index fund over 10 years. 8 years into the bet, the S&P 500 is crushing the crushing the hedge fund and Buffett is not shy to show the results. The S&P is up 65.7% and the hedge fund group is up only 21.9%. Then Buffett went on an epic rant against Wall Street. It might be a tough time to invest in a hedge fund, but it's not a tough time to be in the hedge fund business because of high fees. Fees were at the center of Buffett's rant. Basically he told everyone that travelled to Omaha to buy the S&P Index fund and sit on it instead of putting your money with hedge funds. Buffett was building on an argument he's been making for years about why backing U.S. businesses in aggregate, through low-cost funds, is the more certain way to prosper over the long haul. He also said not to hire consultants.
Valeant – Sequoia Fund
I was impressed on how diplomatic Buffett was on a question regarding the Sequoia Fund and Valeant. The Sequoia Fund is the fund that Warren Buffett referred people to after he closed his partnership. He still has close ties to the fund and to my knowledge, is one of the two funds that Buffett has endorsed. Valeant's story is well documented so I won't rehash everything that's been said in the media. While Munger has repeatedly publicly trashed Valeant, Buffett has been mute on the topic. However the unofficial behind the scene chatter said that Buffett hates Valeant more than Munger. That's why I was impressed at the delicate and diplomatic response Buffett used when responding the question. While answering the question Buffett also said that he approached to make a significant investment in Valeant which he obviously declined.
Over 45 years through the end of 2015, Sequoia Fund has returned 14.0% per annum versus 10.8% for the S&P 500 index, with $10,000 invested at Sequoia's inception worth $3.9 million, versus $1.0 million for the same amount invested in the index. While Sequoia has beaten the market over the past decade, through the end of 2015, their investment in Valeant has diminished a record that we have built over two generations. At one point Valeant represented over 40% of their portfolio! The position became a controversy at Sequoia after Valeant started running into trouble. Sharon Osberg, Buffett's bridge partner, resigned from the Sequoia's Board after expressing her objections over the large size in Valeant and the decision to buy more. Sharon Osberg is obviously Warren's eyes and hears at Sequoia since they talk a couple times a week. The Sequoia Fund is currently Valeant's largest shareholder with 9% of the company, slightly more than Bill Ackman's Pershing Square.
That's all folks. The trip was definitely fun. It's too early to say if I will go next year but if you have never been I highly recommend you go at least once. They are not getting younger!
Cheers,
Brian
