Berkshire, baby!

Color Commentary

1. The Pilgrimage

What a weekend. I’m home from the Berkshire Hathaway shareholder meeting weekend in Omaha, Nebraska, and I’m horribly jet-lagged. I woke up this morning at home in Zurich at 3:30am, but no matter. I’m still riding high on the vibe of forty thousand value investors all joyfully waiting in line to crowd into the CHI Health convention center on the first Saturday in May to hear our investing gurus, Warren Buffett and Charlie Munger.

The joy of that meeting, you guys. Everyone there is SO happy be there in Omaha and it creates an overall feeling of – well, people call it the Woodstock of Capitalism, and that’s accurate. I even got the t-shirt.

It was no industry event filled with finance bros in suits. It’s all different sorts: recent shareholders like me, long-time shareholders whose lives Berkshire has changed, and yes, some Buffettologist professionals in suits who are there to see colleagues. I saw a huge contingent of attendees from East Asia, mostly Chinese as far as I could tell from walking by large groups of Chinese speakers, which reminded me just how much money the Chinese have to invest and that they’re putting at least some of it in classic US companies like Berkshire – and are engaged with that investment to the point of flying to the Midwest to ask questions of Buffett himself. The legend of the Oracle of Omaha has made it to China.

The best part is that the whole weekend is about friendly events celebrating simple pleasures, like a picnic at the (Berkshire-owned) Furniture Mart, or bridge with Bill Gates at (Berkshire-owned) Borsheim’s Jewelry, or shopping in the convention center hall from an array of (Berkshire-owned) companies. Shareholders wanted to simultaneously support Berkshire companies with their consumer dollars and cast a critical eye over the company’s current offerings, to make sure they’re still up to snuff and confirm they can expect their investment dollars to keep doing well in the future. This company, after all, is the retirement plan for many of them. Exactly the right attitude.

My favorite thing about the vibe there is the best kind of conscious capitalism. I found myself continually expecting either some sort of “socially responsible” bent – a charity booth in the shopping area, perhaps – or to be completely gouged on prices – $50 for a Berkshire commemorative mug, perhaps.

Is it just me – usually at these sorts of things with a captive audience at a conference or convention, don’t they raise prices to nosebleed levels and you sort nod and pay $20 for a donut and feel super resentful later?

But nope. Not there. At every turn it was capitalism at its best. Great goods at fair prices.

Instead of gouging attendees, they were thanking us by offering everything at discount prices, only available that weekend to Berkshire shareholders. The Fruit of the Loom booth literally had a VELVET ROPE LINE like it’s LA’s hottest club – you can’t make this stuff up! A friend explained, “oh everyone goes there because the underwear is so cheap.” I heard some shareholders wait all year to show up and buy their underwear and t-shirts at the Berkshire meeting. Clearly I’m going to be doing the same from now on. Here, again, the temple of great goods sold at fair prices, everything was ON SALE.

That expectation I didn’t even realize I had is how inured I am to our opportunistic capitalist culture – either I expect to be taken in by some nice-sounding “conscious” element that makes me feel better about what the company does, or I expect to be required to pay ridiculously high prices simply because they can get away with it. I’m so used to it that I didn’t realize those were my unconscious expectations until I was met with the opposite. My eyes were opened at Berkshire.

2. Variant Perspectives Conference

I was honored to be invited to speak at the Variant Perspectives conference on the day before the Berkshire meeting, on growing more assets under the management of women. Before the conference, I was signing my book at a value investing book fair at Creighton University Business School, which I love doing because I get to meet so many readers and write special messages in their books. A bunch of members of The Invested Practice showed up there – hi guys! – and I was rushing to get over the conference before my panel, so I missed the beginning of the conference.

Guess who opened the conference? Mr. Warren Buffett.

I MISSED HIM.

I could have been five feet from him and I missed him! Aaaaauuughhhh. I have no words.

The video is here, and it’s 15 minutes worth watching. His decision to show up to launch this particular conference, of the multiple ones that day, was purposeful: he wanted to convey support for the cause of women fund managers. Multiple studies have shown that businesses with diverse Boards of Directors do better financially, and women hedge fund managers have outperformed the hedge fund average by 20% over the last decade. Yet women have only 3% of hedge funds, and only 1% of all assets under management – which means those fund sizes are quite small.

Mr. Buffett noted that if women are taught that finance is not for them, it becomes reality. “If part of the background was an educational system and a culture that told you you really weren’t any good at something, you won’t be good at something. That becomes a self-fulfilling type thing.” After all, stocks don’t care who buys or sells them. “I think what I’ve learned in the first 88 years is that I don’t see any reason for there to be a difference in men and women making investment decisions. The stock doesn’t know who owns you.”

That’s true. Stocks don’t know if I own them or not. However, the part of the process that does know if I’m a woman or not is the investor, boss, teacher, colleague who can make or break this process of learning. “If an investment idea came in from the outside,” Mr. Buffett noted, “I would not ask the sex of the person who was sending it. It wouldn’t make any difference.” I hope that’s true. Many women have found that, for others, it’s not.

The cool thing about developing my own investing practice is that I don’t have to care. I’ve found that developing my own path and practice – which looks different from that of most men investors I know – is the most empowering, loving, deeply soothing form of self-care I’ve found. When I’m upset now, I go to my investing practice. I really do. It grounds me and reminds me that there’s more than whatever it is I’m bothered by, and that I’m going to be ok because I have skills and knowledge that I’m growing day-by-day. I can be myself, and being myself makes me a much better investor than if I were trying to be some strange version of myself. The more women can be ourselves, the better we’ll become as investors. Indeed- the more we can ALL be ourselves, the better we’ll become as investors. That’s the point of investing practice. That’s what I talked about there, and the audience loved it. We non-financials definitely tend to get the message that we have to behave differently from ourselves to be successful in investing, and I think there’s a real desire to hear that you don’t have to be a strange version of yourself to take the power over your own money and invest it. It is possible. We are doing it.

3. Saturday Morning

The day of the shareholder meeting. The competition for seats is fierce. Most of the people there came from a long way away to get as close as possible to Buffett and Munger as possible, so people start lining up outside the center as early as 2 or 3am. I’ve heard some people camp out. Everyone’s got their own system of timing and where to line to get into the convention center as early as possible. It’s only my second year, so I had no clue what to do. My friend Darrell and I showed up at 6am and were pretty far back in the line, but when the doors opened at 7:30am, we beelined for good seats and got them. We were PRETTY proud of ourselves, I can tell you.

Everyone is tired and hopped up on adrenaline, and there’s only one proper coffee booth with good coffee and the line is long. So I stood in that line, happily got some coffee, and made it back to my seat by the time the movie started.

The MOVIE, you guys. This is a Berkshire tradition. Buffett spends time making a completely original little short film every year, created by his daughter, Susie Buffett. They don’t broadcast the movie, to my knowledge – it’s one of the things for which you have to be there. This year was Buffett at Apple, creating a secret new game with Tim Cook. All the movies feature Berkshire companies, and are surrounded by cute and creative ads for other Berkshire companies. Again, the theme is one of consistent promotion of Berkshire companies, and each one is treated like a superstar by the audience with applause and hoots. It’s pretty weird to see a GEICO commercial get spontaneous clapping from the people around, but in that context, somehow it works. Woodstock of capitalism.

4. High Points of the Meeting

You can watch the whole thing here and read this free transcript of the whole thing here. I’ll link to the relevant sections below where I can find them broken out online.

Overall, I was really surprised by how much Charlie Munger talked! He usually falls back on Buffett answering and him saying, “I have nothing to add,” but this year he not only added on to Buffett’s answers many times, a couple of times he even interrupted Buffett to be the first person to answer. Charlie’s getting feistier!

Succession. Buffett and Munger were asked, as they are every year, whether the Berkshire vice-chairmen Greg Abel and Ajit Jain would take the stage with them. For the first time, Buffett said they probably would in future years. That’s a big change. I remember last year, Buffett was asked a similar question and he dodged it, essentially saying it wasn’t necessary for them to be on stage. Different tune this time, which to me, means he trusts them. I heard a story from a longtime shareholder that made me understand better why Buffett and Munger have been so reticent to name a successor. Some years ago, they all but announced that David Sokol would be their successor, when Sokol recommended Berkshire buy a company in which he owned shares, called Lubrizol. The story goes that Sokol got the heads-up from an investment bank about the company being a good buy, he bought shares allegedly anticipating the deal, Berkshire did the deal and bought Lubrizol, and he made $3 million on it – a small amount compared to his salary of about $25 million per year. Buffett may or may not have known he owned shares in Lubrizol; reports are unclear. What IS clear is that when Buffett found out Sokol had been an interested party in the deal, he fired Sokol. Since then, Buffett and Munger have been understandably wary of naming anyone as the heir apparent. Berkshire, by the way, still owns Lubrizol and it’s been a great company for them, so the underlying decision was sound – it’s just how they got there that was not. What a crazy boneheaded thing for someone to do – blow up his reputation for something so relatively small. Here’s a few summaries of the situation and its outcome here and here.

All Investing is Value Investing. Berkshire Hathaway recently bought Amazon stock, which many of Buffett followers believe is massively overpriced. So the question is fair: is this a change in how they view their investing style? The answer was that Ted or Todd bought the shares, not Buffett or Munger, and they are looking for something that will be worth more in the future. Buffett notably didn’t support that exact purchase, but he did support Ted or Todd’s choice as completely being a value investment. Buffett repeated his line from the Variant Perspectives conference that investing is about Aesop’s “a bird in the hand is worth two in the bush,” in that we look for whether the bush will still be there in ten years, how far away the bush is, how many birds we think is in the bush, and what the worst case is when we actually make it to the bush.

Wells Fargo. In 1991, Buffett temporarily ran Solomon Brothers after a huge scandal. The video of his statement to Congress about that scandal is played before the start of every shareholder meeting to emphatically show Buffett’s, and Berkshire’s, commitment to integrity, reputation, and honesty. Famously, he admonished Solomon’s employees: “Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.” So this year, when a shareholder asked why Buffett is handling the Wells Fargo situation now quite differently from that Solomon Brothers situation, I thought it a fair question. Buffett and Munger both characterized Wells Fargo as having made mistakes of judgment in setting up its incentives. Charlie even said, “I don’t think anyone deliberately did [wrongdoing].” They turned it into a question about CEOs who DO break the law. From my notes (probably not a verbatim quote, but it’s close): Warren Buffett: “If you’re breaking laws you should go to jail. CEOs should leave rich under those circumstances. If a bank has to be bailed out then CEO and directors and their spouses should lose their net worth. But they don’t. It’s always the shareholders who pay.” It’s always the shareholders who pay. This really struck me. For years, I’ve thought of a stock as going up and down, and now I understand that price is different than its value, and we act like we’re buying the whole company long-term and think like an owner, and that all makes plenty of sense. But when Buffett noted that it’s the shareholders who lose money when an avaricious CEO screws up a company, I suddenly glimpsed what it’s REALLY like to think like a true owner. It’s not just my gamble, my investment that goes down. If I’m an owner of that company, I just lost money. That CEO just lost me money and I’m the one paying for it. That’s how Buffett literally sees it – probably because he frequently buys entire companies, and also because he’s been stuck with the mess afterwards. He’s said the Solomon experience was “far from fun” and soured him on Wall Street for quite a while, until he bought Goldman Sachs in 2008.

Circle of Competence. How did Buffett and Munger deepen and widen their investing circles of competence, and what would they do differently, if anything? From my not-verbatim notes:

Buffett: You’re right, the market is much more competitive now than when I started out. I did as much reading as I could about as many companies as I could’ve and figure out which ones I could understand better than my competitors. I focused on having as big a circle as I could have, and I was realistic about where the edges are so I could make the circle as big as possible. I learned insurance and thought ok I can understand it. Retailing was a bit harder. Lots of competition. If you don’t feel a compulsion to act too often and wait until the odds are strongly in your favor, it’s an interesting game. It’s harder than it used to be.

Munger added on. “Specialize. No one wants to go to a doctor that’s half proctologist and half dentist.”

Buffett: I used to go to the standard and poor library. No one would be there! I just read. I’m no genius but I’m smart in spots and stay around those spots.

Munger: We did it in several fields and that’s hard to do.

Accounting Terms Are Dumb. Men after my own heart. Buffett and Munger both opened the meeting by railing against the current GAAP marked-to-market standards for the inaccurate view into a company’s earnings. Later, when talking about how he writes the Berkshire shareholder letter, Buffett noted that he writes the letter to his sisters so that someone, like them, with the substantial portion of their net worth tied up in Berkshire would understand everything he describes in the letter. Buffett said he doesn’t use the term “combined ratio” in the letter because “it’s a dumb term” and means a profit margin, so he just uses the term “profit margin”. He’s not writing it for analysts. He writes it for shareholders to explain what they’re trying to do over time.

Mission. Berkshire doesn’t score well on the “ESG” reports. ESG stands for Environmental, Social, and Governance; essentially, the Mission factors we’re looking for. I’ve got this topic teed up for a future issue because I really want to understand how these scores work, what the standards mean (“impact” is different from “ESG” is different from “socially responsible” is different from “conscious capitalism” and the whole thing is exhausting), and why certain companies do well and others don’t. Buffett said exactly what I expected: the reality is that Berkshire does measure up well, but they don’t prepare reports for these ESG rankings that are done. They have something like 60 subsidiaries, and they don’t want to ask each of them to spend time filling these reports out. He said, (again from my not-verbatim notes, but pretty close): “We want our managers to do the right things. We give them huge latitude to do that. It works. We keep expenses and needless reporting down at Berkshire. We’re not going to tie up resources if we don’t need to, and we don’t need to worry about activist investors coming in to make trouble the same way corporate America does.”

Sticking Together. My notes say, “Sticking with people for a long time adds a lot of happiness.” That’s been staying in my mind quite strongly and I’ve been thinking about it on the plane and when going to sleep – how to cultivate lifelong connections with other investors, because that is where the joy is, for me. I went back and looked up where that note came from, and it was a question about how Charlie and Warren have gotten along without disagreeing for so many years. Buffett answered that it’s lifelong involvement with other people that has had the biggest impact on him, and that he recommends you look for somebody better than you and then try to be like they are.

50% Return. I actually submitted a question to the journalists before the meeting, but my question did not get chosen. (The gall!) Instead, they asked essentially the same question from someone else: Buffett recently said that he could make 50% per year if he was working with one million dollars. (He’s said that many times, actually. Clearly, he thinks about it!) How would he do it? He didn’t really give us a direct answer, unfortunately. “Fringe inefficiencies” was his response. Fringe inefficiencies? Someone who knows more than I do about financial markets is going to have to explain what that means, probably one in particular on our next podcast. Arbitrage of some kind, I suppose? Or options? Very unhelpful.

And on that note, I’m going forward and ignoring this idea of 50%. I’m glad a stock market genius like Mr. Buffett knows how to do it because it makes my comparatively low 15% annual rate of return goal sound ridiculously easy.

LET’S GET PRACTICAL

Warren Buffett, Charlie Munger, and Bill Gates (who is a director of Berkshire) were all interviewed together on CNBC. I just enjoy watching them together. Who knows how much longer we’ll get the pleasure, and they clearly just like each other.

What’s stayed with me from the meeting:

If you haven’t read it already, read this interview with Charlie Munger at the Wall Street Journal (paywall). It’s amazing and was the talk of the meeting. There are so many nuggets of wisdom in there, and my favorite is this:

“Part of the reason I’ve been a little more successful than most people is I’m good at destroying my own best-loved ideas. I knew early in life that that would be a useful knack and I’ve honed it all these years, so I’m pleased when I can destroy an idea that I’ve worked very hard on over a long period of time. And most people aren’t.”

I’ve been thinking about that statement since I read it almost a week ago. Am I someone who has the grit to destroy my own best-loved ideas?

Or is my confirmation bias so strong that it will keep me attached to something that no longer serves me? The answer will determine my success, I think.

Are you someone who has the grit to destroy your own best-loved ideas?

Sticking with people for a lifetime brings a lot of happiness. Who could be your lifelong investing buddy?

Ownership Disclosure: Danielle Town owns shares in Berkshire Hathaway (BRK) .

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