Great investors are always interesting to listen to. The biggest person of all, in the investing field, is the legendary Warren Buffett, and his long time partner, Charlie Munger. They, together, run Berkshire Hathaway, a holding company that is worth over 400 billion dollars today, from a tiny nearly-bankrupt textile company 50 years ago.
The annual general meeting of Berkshire is a pilgrimage for investors. That’s not because Buffett gives people stock tips. It’s that people want to hear from him about life, investing, concepts etc. because he makes such witty and pithy comments about the most complicated of things.
Like when he wanted to make a point about how everything looked good in good times, but some companies wouldn’t do so well in a crisis, he said:
It’s only when the tide goes out do you know who’s swimming naked.
There are tons of them and the internet shows you a gazillion. There is therefore this attraction to the annual general meeting every year. While I’m not actually a fan-to-the-death, I had to visit it once to see what the whole thing was about. And in many ways, you don’t come out disappointed. Because the atmosphere, the connections and the scale of it all is educating and energizing. Here’s a few things I learned.
First, a summary video:
AGMs Can Be Shopping Festivals Too!
Berkshire invests in a lot of companies. Borsheim’s, a jewellery retailer, is owned by it. As is Brooks, which makes running shoes and clothes. See’s candies, which sells premium candy and chocolates, is an early investment. Then there’s Dairy Queen, Coke, Wells Fargo, Netjets and even the local Nebraska Furniture Mart.
In the annual general meeting, all the Berkshire companies set up stalls in a shopping area and offer discounts. See’s even had custom bags which Munger and Buffett’s photo on them, and Spalding (a sports brand) even made special balls with the BRK symbol, for the meeting. Everyone had a discount on – including Bose and Dyson appliances.
More companies need to do this, even in India. There’s a truckload of Tata companies, from A/C manufacturers, to coffee to retail to clothes and what not. Why doesn’t their AGM have shareholder shopping and some discount? Tata even has an “investment” company called Tata Investments, which can be a placeholder for such annual shows. And then there’s Reliance, DMart, Future Group, Mahindra and what not. You want your shareholders to be your customers as well!
The power of narrative: The story trumps everything
While Berkshire has been a phenomenon over the last fifty years, the stock has not beaten the index in the last 10 years. The underperformance, be it from earnings growth or market cap growth isn’t a concern for Berkshire investors, because Buffett has done well in the past. They don’t even question the $100 billion in cash he hold on the books, without generating any return.
Part of the allure of BRK is the storytelling. Buffet is a master storyteller, as is Munger. They are 88 and 95 years old , respectively. Yet, they’ve been able to brush away questions about succession, no matter how it’s asked ieach time. The narrative they have been able to build is a real moat – it protects them from a lot of negativity.
We’ll mention a few here, from the 2019 annual general meeting.
Don’t Ask Mozart How To Compose
One question raised by an upcoming fund manager was: Should I manage other people’s money?
Charlie brought this about with an anecdote. Mozart was asked by a young musician: How do I compose a symphony?
Mozart: You’re too young to compose a symphony.
Boy : Hey, you started composing when you were 10, and I’m 21!
Mozart: But I didn’t run around asking people how to compose.
The audience burst into laughter. The point is subtle and direct, and I think there’s a lot more here than that was said. But at this point, I’d like to bring in The Good, The Bad and The Ugly, a legendary western movie. “Ugly” was having a bath, when a man turns up with a gun and says he’s going to kill him, and its about taking revenge and he’s finally found the man who he has wanted to kill for ages and so on.
Ugly shoots him with a gun (of course he’s holding a gun during a bath, come on) and says: When you have to shoot, shoot. Don’t talk.
If you go around asking people if you should do something, or whether doing something is worthwhile, when it’s obvious to you that it is, then you know what? You should be advised not to do it.
If you ask Buffett how to invest, or if doing it is worthwhile, apart from getting smacked on the face with the obvious, the advise you should receive is that you shouldn’t do it. Because if you were truly interested, you’d see what he’s done, and then do it. You would see he’s bought into a business called See’s candy, and that that one investment needed no further additional money, and it kept generating returns, year after year, and you’d find a business like that and invest in it.
But if you ask Buffett, he’s going to tell you instead that you should invest in ETFs, and not worry about the investment.
Long term Buffett followers say that oh, Buffett is a legend, so he’s capable of being an active manager. For everyone else, ETFs do just fine.
What I would say is: If you want to invest, invest. Don’t go around asking.
Some Businesses Have A Limit To Scale
Someone asked if there was an issue scaling See’s Candies, which hasn’t gone anywhere close to, say, Hershey’s or such. Buffet talked about the issue in detail – that they tried as much as they could, but the candies that See’s offered were primarily something you would gift. It’s a great gift, even if expensive, and the chocolates would simply vanish in minutes when the box was opened.
But you wouldn’t go out and buy a box for yourself.
That limited what the brand could grow to. So they chose to let it grow as much as it could, without investing crazy amounts in expansion.
My feeling is that the basic tenet of investing in See’s was that it provided free cash flow. Meaning you wouldn’t need to invest more in the business, and it would generate cash to throw back. Normally you might invest in expansion with the cash, and thus generate even more cash.
The problem though was that to expand, if the current format didn’t work, they’d have to cut their margins (lower cost candies) and increase marketing spend. Both of this take away from free cash flow – either lower revenues or higher expenses. And if that results in reducing brand value from the original business – which is seen as a great and expensive gift – you lose cash flow from existing business too. In general, they found the limit to which the business could grow without changing and without cutting into their free cash flow generation.
And then, they used the free cash instead to grow into other businesses. This is an interesting way to look at a business that can do very well as it is, but if you try to push it to what it isn’t, it will flounder. There are many such businesses in India, perhaps. A Krishnaiah Chetty in Bangalore is a great standalone store, but if it tried to expand too much, beyond the geography, the issues of decentralization might impact quality, something they are known for. And their “cash cow” – the Bangalore store – could start losing revenue. The nature of an investment is not just to find out what works, but to also find the limits at which it stops to work.
In the financial world, we find this often with algorithmic high frequency trading. Beyond a certain amount of capital you just can’t deploy money. You have to use that profit to fuel something else – a lower frequency strategy, investing in other markets, and so on. This requires, perhaps, a mentality change as well – someone who trades in and out in 5 minutes may not behave quite rationally in losses for a multi-year holding strategy. If that isn’t possible, you just play to your strengths and figure out that the money it generates might have to go to an entirely different business.
Charlie’s answer was hilarious: It’s the same reason you haven’t won a Nobel Prize in Physics, or achieved immortality. (It’s not that someone can’t do these things. But there’s a point in life you realise you are never going to get there.)
Why Berkshire Has No Index Fund in Portfolio
Buffett has mentioned that he thinks Index funds will do well over the long term. The cash they have – over $100 billion – is primarily invested in TBills. But why don’t they invest the money in the S&P 500, asks a person in the audience, saying they would have had $20 billion more had they done that even since 2007.
Buffett replies that it’s difficult to do that since the money is too much and it would distort returns. But more importantly they want access to the cash whenever they need it, in an emergency, because that’s what is needed in an emergency: cash.
To me this is a little incongruent. You don’t need all of the money at one time, surely, and the quantum is just too large – even at the peak of the 2008 crisis they could deploy only a fraction of the amount (even Goldman Sachs only took $5 billion or so). It might make sense to even put a part of that money – 25% or so, let’s say – in index funds, if for nothing else, to do what they believe other people with money should be doing. In any case, says Charlie, we aren’t going to change.
Why the Berkshire AGM doesn’t talk about individual stocks too much
Warren says they aren’t in the business of explaining why they own every stock they own. Why in the world should they tell the world a stock is a good purchase?
This is a very good point. We all love what they say, and that makes them our friends. However this is not a meaningful friendship if you assume that they will tell you why the stocks they are buying are awesome, and somehow handhold you through this process. Blind following is stupid, but blind expectations of strangers to hurt themselves while helping you is even worse.
Don’t Go Overboard on Delayed Gratification
A child asked Buffett how a young person could learn about delayed gratification.
Buffett gave some life advice I wish everyone really followed. Don’t delay your happiness because you’re going to get some awesome thing in the future. Don’t save the money of watching a movie because you will get to watch it many years later with a little more popcorn. (I paraphrase, but that’s the gist)
The enjoyment you get by spending money today is worth not waiting for too long to enjoy it later. Time is a finite resource.
At Capitalmind, we’ve always wanted this: Find out what you really need to secure your future, and enjoy the rest of the money. There’s no point saving beyond what you really need to save; and that spending can give you immense happiness. You won’t remember the days you didn’t do something awesome, and when you’ve got no capacity to skydive or snorkel or travel or what have you, you will still have the capacity to remember when you did.
What We’d Like To End With
Berkshire’s story is legendary. Even when his stock has been only so-so in the last decade, the world loves Buffett as a money manager. Even though he didn’t participate in many stocks that changed our world – from Amazon to Apple – and only got in when they’d become behemoths. Even when he keeps cash he says he can’t use but will not distribute.
You have to admire this about someone who’s more than 85, and has a phenomenal track record (beyond the last 10 years). That the franchise he has built attracts people to his companies, and his investments on the back of a phenomenal personality, apart from the investment acumen. That this franchise ensures sales (16,500 people at an AGM, most of them shopping from Berkshire companies) and loyalty. That is a moat that will help them as long as Buffett and Charlie are alive. After that, in Charlie’s words, it doesn’t matter to them that much.
It’s been a useful visit to understand this and many other things. It’s not about what they buy. It’s not about what they say. It’s about how they say it, and the joy that it brings you as an observer.
Here’s our full thread on the AGM: https://twitter.com/deepakshenoy/status/1124705836842962945