Woodstock for capitalists
Two cans of Coke, two men in their 90’s and a box of peanut brittle.
Believe it or not, these three ingredients can come together to make for compelling viewing.
On Monday, half a million viewers tuned in for what has been dubbed “Woodstock for capitalists”: Berkshire Hathaway’s Annual General Meeting.
The event was a little more muted than usual this year, as it was once again held virtually. However, there was sage advice and insights on offer from the nonagenarian duo, some of which we share this week.
We also had our own Woodstock this week (somewhat) in the form of the Macquarie Australia Conference.
Several First Samuel companies presented at what we consider ‘Reporting Season: Lite’, where companies had time to get down to the nuts and bolts of their businesses.
Main stage: Berkshire Hathaway’s Annual General Meeting
It is hard not to be sucked in by the affable, optimistic character of Buffet, or the razor-sharp wit of Charlie Munger (who turned 97 this year).
The 2020 AGM brought with it its usual mix of optimism, American pragmatism and of course, classic one-liners from Charlie.
Here‘s what we took away from it.
Source: Wall Street Journal
“Extraordinary things can happen, things that are obvious to you”
One of our mantras at First Samuel is that change is inevitable. Change certainly defined 2020 for many of us and set into motion changes in the way we work, play and everything in between.
As we have highlighted in our CIO events, the ability to recognise change and adapt portfolios accordingly is a crucial part of active management.
Buffet provided a fantastic example of this.
The slide below is a list of the 20 largest companies in the world by stock market value.
Source: Berkshire Hathaway
The simple question Buffet asked is, of these companies – how many would you expect to be on the list 30 years from now?
Slide two shows is a list of the largest 20 companies from 30 years ago.
Source: Berkshire Hathaway
Readers will note the top four are symptoms of a bubble in all things Japanese in the ’80s. Easy to see in retrospect.
They will also note that zero of the largest companies in 1989 have remained on that list 30 years later.
While a ‘buy and hold forever’ strategy is often looked upon with a sense of reverence, almost all companies are subject to the gravity of competition over time. Change is inevitable.
(Note: The Top 20 phenomenon has played out to a lesser degree in Australia over the last 30 years, due to our two-track housing and resources-based economy.)
“Picking industries that are set for growth is not the most complicated part of picking stocks. Getting the companies right is much harder.”
In our CIO events, we highlight some key themes and trends we see will shape the decades to come.
One is DLT. It stands for Distributed Ledger Technology and it has the potential to change everything, from the way you bank to tracing the provenance of your favourite drop of red.
It may be more familiar to you as the technology that has spawned Bitcoin, Ethereum and of course Dogecoin… As Buffet highlighted, people get enormously excited by new industries, technologies and the blue sky they paint.
While it may seem obvious as to what “the next big thing” is, picking the company that will ultimately reap the benefit of it is much more challenging.
Buffet uses automobiles as an example.
The big news in 1903 wasn’t that Henry Ford was starting the Ford Motor Company. It was the automobile. Imagine for a moment that in 1903 you had a glimpse of 2021. You would see all the interstate highways, 290 million vehicles on the road in the United States and conclude the best investment is “…going to be cars. It’s going to be autos”. Simple.
Not quite. In the 1930s, there were 2000 car companies in America. By 2009, “there were three left, two of which went bankrupt.”
It is not just automobiles. We saw this with railroads in the 1840s, internet stocks in the late ’90s, and cryptocurrency today.
There is more to investing than picking a wonderful industry, trend, or good idea. Picking the right company is incredibly important.
“I do not consider it a great moment in Berkshire’s history.”
Financial markets can be incredibly humbling. In 2020, not even the greatest investors of all time were immune.
At the bottom of the market in March, Buffet unceremoniously dumped Berkshire’s holdings in airlines at close to their lows.
This was far from the “be greedy when others are fearful and fearful when others are greedy” mantra that Buffet extolls. In retrospect, selling airlines was a mistake.
However, as Buffet pointed out, net sales during the period were small, about 1-1.5% of Berkshire’s entire assets.
Furthermore, if not for the dramatic intervention by the Federal Reserve and US Government, the airlines could have been in serious trouble. And as a 10% shareholder, Berkshire, not the government, would likely have had to foot the bill.
In hindsight, a mistake. But at the time, perhaps not.
In an alternate history, where the US economy was not bailed out, the decision may have been praised as prudent or prescient!
Good decisions don’t always lead to good outcomes.
“We’re seeing very substantial inflation. It’s very interesting. We’re raising prices.”
Whether it be lumber, shipping, copper, steel, corn or semi-conductors, a lack of supply met with a jolt in demand has seen an array of input prices climb higher over the past year.
Berkshire does not see the world any differently.
With subsidiaries in industries that run the gamut (from clothing to logistics), Berkshire is very much at the coal face of American industry and has its finger on the economy’s pulse.
When asked about the inflation that has been seen recently, Buffet responded:
- “We’re seeing very substantial inflation. It’s very interesting. We’re raising prices. People are raising prices to us, and it’s being accepted…it’s an economy really, it’s red hot. And we weren’t expecting it.”
- “People have money in their pocket and they pay the higher prices. When carpet prices go up in a month or two, they announced a price increase for April, our costs are going up. Supply chain’s all screwed up for all kinds of people, but it’s almost a buying frenzy.”
- “…it is not a price-sensitive economy right now in the least. And I don’t know exactly how one shows up in different price indices, but there’s more inflation going on, quite a bit more inflation going on than people would have anticipated just six months ago or thereabouts.”
To which Charlie chimed in:
- “And there’s one very intelligent man who thinks it’s dangerous and that’s just the start.”
Recently, it seems whether segments of the economy are experiencing inflation is no longer up for debate. How long this inflation is likely to persist is now the question.
The current consensus is that this inflation is likely to be transient, with persistent inflation unlikely until unemployment falls leading to pressure on wages.
Higher employment is an explicit and predominant aim of central banks over the coming years. This, coupled with a shift towards ‘average’ inflation targeting and reactive rather than proactive policy is setting up a very pro-inflationary environment.
While we are not certain as to how this will pan out, we know that declaring inflation as ‘dead’ with certainty could be very dangerous. As Buffet put it:
- “We’ve never really seen what shoveling money on a fiscal basis while following a monetary policy of something close to zero interest rates, and it [the result] is enormously pleasant…But there are consequences to everything in economics”.
…plus, a few one-liners
On the ageing management at Berkshire:
- “In three more years, Charlie will be ageing at one per cent a year… So, we will have the slowest ageing management, percentage-wise, by far that any American company has.”
On the profession of economics:
- “Yes, and the professional economists, of course, have been very surprised by what’s happened… it turns out the world is more complicated than they thought.”
On moral judgements of companies:
- “If you expect perfection, in your spouse or your friends, or in your companies, you’re not going to find it.”
On generational inequality:
- “The millennial generation is going to have a hell of a time getting rich compared to our generation. And so the difference between the rich and the poor and the generation that’s rising is going to be a lot less. So Bernie has won. He did it by accident, but he won.”
- “They’re taxing hope.”