Berkshire Annual Meeting: Buffett Talks About The Important Things

The first thing you may have noticed in the Q and A phase of the Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) Annual Meeting is the image of two old men ready to sit for hours answering questions from all comers on everything from business strategy to how to live a happy and fulfilling life. For the latter, CEO Warren Buffett laid it out in simple terms: "You should write your own obituary and then try to figure out how to live up to it." Your obituary, of course, is something of a moving target thanks to things you learn along the way. Buffett put that succinctly: you don't get smarter, but you can get wiser. Most people the age of Warren and Berkshire vice chairman Charlie Munger have outlived their own obituaries, which read as if they have been in hiding for fifteen or twenty years. One of the great Warren and Charlie achievements is that they continue to extend their future obituaries into the present.

Some of Buffett's life advice is pretty simple: spend less than you earn and be kind to people whether they deserve it or not. Some are counterintuitive, like eating whatever you like even if it happens to be peanut brittle, ice cream, and Hershey's Kisses. Acknowledge your mistakes. What was perhaps a little different this year was the transparency about his thinking, including willingness to provide details that go beneath the surface. What the two old guys on the podium projected was acceptance of their own mortality and being at peace with the things they have been able to accomplish.

The rest was a collection of details, some of them very interesting and instructive.

What Autos And Streaming Services Have In Common

Don't buy them. You have a good idea how Apple Inc. (AAPL) will be doing in five or ten years, Buffett said, but you have little idea how car companies and streaming services will be doing. When it comes to Apple, it's clear that Buffett only paid attention to price when he was buying it. You can see clearly that his buying slowed down and then stopped in 2019 when buying their assets and cash flow became too expensive. Apple then passed into the phase when Buffett's interest in Apple was pure, as a business which throws off cash to its shareholders, including Berkshire. He is also intensely interested in Apple buybacks which have now increased Berkshire's ownership by 5.6% without requiring any outlay of cash.

Autos and streaming services couldn't be more different. They have high costs and no real brand power despite all efforts to gin it up. They live at the center of a maelstrom of change. There's no moat. Paramount Global (PARA), the streaming service Berkshire owns, just cut its dividend, a bad sign in Buffett's view and major evidence that it is a poor investment. The short version is that Apple is a wonderful business while autos and streamers of entertainment are horrible businesses.

So why hasn't Buffett sold Berkshire's position in Paramount? The probable reason is that it wasn't Buffett, but one of his two lieutenants who bought it. I'll have more to say on this later.

Berkshire Won't Buy Occidental Petroleum Corporation (OXY)

I have found myself pulled into this debate in several articles, always as something of a skeptic. My most recent article on OXY focused on the mechanics and how Buffett's continued buying made it easier to get to the 50% plus one needed to buy the whole company. The Burlington Northern acquisition emerged something like this, but Buffett's bid was open and straightforward. It wouldn't have been like him to "sneak up" on owning a majority of shares. The major point I made in all OXY articles was that CEO Vicki Hollub was the key. Hollub still gets effusive praise from Buffett. How would she fit in what would be the third tier at Berkshire? Even within energy, her primary knowledge begins with the extraction of oil equivalent from the ground.

Buffett laid this question to rest at the Annual Meeting without a specific question having been asked. Berkshire won't buy OXY. His reason: "We wouldn't know what to do with it?" Berkshire already enjoys most of the benefits of ownership. Its ownership is over the threshold permitting it to use the "equity method" incorporating OXY's operational numbers into Berkshire's financials statement. If owned in its entirety, where would OXY fit into Berkshire? Presumably in the general area of Berkshire Hathaway Energy, but on closer examination the term "energy" is misleading. Except for its odd real estate unit, BHE is mostly a utility, albeit interested in "green energy" much as Vicki Hollub is. At a market cap of over $50 billion, OXY would not be a bolt-on like the gas pipelines recently added by BHE. Where would OXY and its innovative and masterful CEO fit? It's not obvious. Best to leave OXY as it is, protecting it if necessary from larger integrated oils hoping to buy it.

China

Berkshire's round trip in Taiwan Semiconductor Manufacturing Company Limited (TSM) struck some critics as odd, but it is consistent with past actions by Buffett (remember the airlines and OXY, both sold quickly during the uncertain days of the pandemic). It takes some gumption to change your mind in a hurry, but it's often the right thing to do. An investment often feels different after you own a bit of it.

At the Annual Meeting, Buffett spoke at great length about the virtues of TSM, describing it as the best semiconductor company by far, before saying briefly that the problem was its "location." What he was saying without being specific was that it is located in Taiwan, which the leadership of mainland China regards as a province rather than a sovereign nation. While the operating virtues are not too hard to calculate, the geographic risk which could put Taiwan in the middle of a shooting war is a less definable threat, It is nevertheless a threat with monumental consequences for an investor. Whatever numbers Buffett attaches to that risk (he has given odds on nuclear war), the magnitude of the risk settled in, and Buffett decided that it was better to seek returns elsewhere. The same thinking is behind Berkshire's continuing reduction of its ownership in BYD Company Limited (OTCPK:BYDDF). In both cases, he clearly feels it better not to be overly explicit about his thinking.

Warren and Charlie have different views on this, a fact I alluded to in this article which is linked to an earlier 2021 article arguing that China is uninvestable. With his knowledge of history and broad perspective, Charlie expressed the view at the Annual Meeting that both China and the U.S. were being "stupid" and should resume trade. Charlie's view: differences between the U.S. and China were a small spat. In one way, Charlie is probably right. The U.S. and China have a very mixed history over two centuries, and the U.S. may have been the first at fault with its leadership in the Opium Trade Treaties. In any case, it is no small spat, and however the differences would be resolved in an ideal world run by ideal leaders, the argument is more likely to escalate than get resolved. With his intense single focus on the investment perspective, Buffett doesn't want to take that risk.

Greg Abel Will Make Acquisitions Like Buffett But What About Todd And Ted?

"Greg understands capital allocation as well as I do. That's lucky for us," Buffett said while reconfirming his successor. "He will make those decisions, I think, very much in the same framework as I would make them."

Buffett affirmed that he was "100% comfortable" with Abel as his successor, and I have no doubts about Abel's ability to oversee the roughly 100 businesses and also make the important asset allocation decisions. It's clear that Buffett and Abel worked elbow to elbow in bolt-on deals for BHE, including the purchase of Dominion pipelines in 2021. Abel also said that he would continue the policy of buying back shares when they are cheap. On that subject, a quick look at the price chart reveals that Buffett's $4.4 billion of buybacks in Q1 2023 took place at prices over $300 per B share compared to the range from less than $270 to $300 or so at which Buffett bought only $2.6 billion in Q4 2022. Buffett either likes Berkshire quite a bit better than he did a few months ago or likes the options on the market quite a bit less. Berk's book value tends to rise about 10% per year on average, but that's still an interesting jump.

What didn't come up at the Annual Meeting was the performance of Ted Weschler and Todd Combs, both of whom run about $35 billion. They have clearly had better years. Their better years have been driven by mainstream growth investments like Visa Inc. (V) and Mastercard Incorporated (MA), which were driven in part by good economic times, low rates, and a strong market tailwind. They have done less well with stocks like Paramount, which I assume was the choice of one or both. Stocks of its general profile seem to me best left to deep value investors who pick over companies obviously in trouble. For Berkshire's purposes, Todd and Ted seem to be trying too hard. Their best contribution to Berkshire's larger investment goals was introducing Buffett and Apple, after which Buffett himself ran with it and ramped up the scale.

Buffett was able to do what he did with Apple in part because he commanded the scale to do so. There was, however, a larger if somewhat related reason. Buffett was used to scale - used to it with both publicly traded stocks and acquisitions. Only scale moves the needle for Buffett and Berkshire. Add to that the fact that Buffett brings seventy years of experience (and is more than fifty years removed from making his money from junky value stocks which may make you 50%). He displayed the kind of knowledge he commands in mentioning the fact that See's Candies hadn't expanded more because it "doesn't travel" and despite a few efforts, couldn't get established on the East Coast. He casually mentioned that people on the East Coast prefer dark chocolate while people on the West Coast prefer milk chocolate. Who has a repository of ten thousand facts like that which just roll out without thinking when making a larger point.

One thing worth noting about the difference between Buffett and Ted/Todd is that Buffett brings a lot of context to his investing. He mentioned at the Meeting that he had sold a small chunk of Apple (a mistake he now regrets) in order to take advantage of an advantageous moment to sell for tax reasons. The current availability of 4-5% T Bill returns clearly impacts the value of stocks held for dividends, including perhaps Chevron Corporation (CVX), which was apparently reduced by $4 billion in Q1. Todd and Ted, on the other hand, invest more like a hedge fund, which leaves these questions to their owners.

It has occurred to me at times that the structure of the Todd/Ted task may be flawed. The way they are compensated, though carefully thought out, turns them into traders looking for things everybody else has missed. Greg Abel is advantaged when it comes to investing capital in large chunks because he is a businessman first and has gotten his experience working closely with Buffett. Todd and Ted work at arm's length except for a case like Apple. Would they have grown more if sharing ideas with Buffett? I have no special knowledge of how that relationship works, but I can't resist the idea that they might do better for Berkshire's purposes if they had a better chance to grow in proximity to Buffett. When you stand next to Buffett, you pick up all things having to do with business and investing.

Odds And Ends, And Hidden AI?

Both Ajit Jain and Greg Abel took note of the need to address specific problems. What struck me was that there was an underlying similarity in the two cases. Ajit's problem on the insurance side was the fact that GEICO is being smoked by The Progressive Corporation (PGR), which has an almost 20-year head start on GEICO in telematics. It's ironic because the historic advantage of GEICO was in selling to government employees who rarely get drunk and wreck their cars.

Unfortunately for GEICO, the world has moved far beyond noticing a single idiosyncratic pattern. The Progressive advantage is in telematics, the ability to track actual driver behaviors. A friend of mine in the business tells me the next major thing is the use of algos to do pricing and propose settlements. Algos, he says, tell you more things more accurately than any amount of human assessments. Doctors already know this about diagnoses (and often try to deny it). The problem on Greg Abel's side of non-insurance businesses involves BNSF Railroads needing to move to precision scheduling railroading.

Banks

Buffett clearly thinks almost everybody did a bad job leading up to the March banking crisis. The FDIC was clearly inattentive and so were bank leaders to the point of deserving "punishment." He and Charlie go back to the 1970 Bank Holding Company Act, which forced them to divest a small bank they had bought for $19 million which promised to be more profitable than a small insurance company bought for $17 million. Ultimately, insurance worked out quite well.

In the past few years, Buffett has surprised many observers by selling rather than buying banks available at cheap prices, ultimately whittling down his bank holding to Bank of America (BAC). I wrote this article talking about the likelihood that he now sees BAC as the best house in a bad neighborhood. At the Annual Meeting, Buffett revealed that he had kept it in part because he had reached out and built a position (now with large embedded capital gains) with help from a profitable preferred stock deal. I bought at about the same time and look at my cap gains regularly to see if I can talk myself into taking some profit and paying the taxes. I suspect he does too, especially when he thinks about $100 billion of paper losses on BAC's balance sheet.

Conclusion

Warren Buffett came as close to an economic forecast as he ever does and acknowledged that many operating businesses within Berkshire Hathaway Inc. were likely to do less well through the rest of the year. He did not say that any Berkshire Hathaway Inc. units would have any serious difficulty or perform worse than the economy as a whole.

Investors at the meeting seemed OK with that. So am I. I continue to agree with the Strong Buy rating and high ranking among all stocks which Berkshire Hathaway Inc. receives on the SA quantitative system.

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