Fifty years ago, an investment partnership controlled by Warren Buffett acquired control of Berkshire Hathaway Inc. (BRK), a struggling textile manufacturer. Buffett has been BRK’s Chief Executive Officer since 1970. He is a legend among value investors—and for good reason. His investment record is unmatched by virtually any other investor over the last 100 years.
With the benefit of hindsight, Buffett refers to the BRK acquisition as one of his worst investments. Buffett shuttered BRK’s textile operations in 1985. Fortunately, he used some of BRK’s cash flow to acquire interests in such diverse businesses as insurance, newspapers, manufacturing and finance. The $20 million float—money generated largely by insurance premiums that does not belong to BRK, but that it temporarily holds—that came with BRK’s 1967 purchase of National Indemnity had ballooned to $83.5 billion at the end of 2015’s first quarter.The backbone of BRK’s business is its insurance operations (GEICO and General Re are other insurance companies purchased by BRK). BRK also owns equityinterests in such well-known companies as Wells Fargo, Coca-Cola and American Express. Its list of wholly owned subsidiaries includes Dairy Queen, Pampered Chef and See’s Candies. Under Buffett’s guidance, BRK was first transformed from a textile manufacturer into an investment vehicle. Today it is a conglomerate employing more than 340,000 people.
BRK’s annual shareholder meeting in Omaha, Nebraska provides investors with the opportunity to hear Warren Buffett and his right-hand man, Charlie Munger, field attendee questions for about six hours. Munger is BRK’s Vice-Chairman. In this capacity, Buffett describes Munger as “my partner.”
This year, I was fortunate enough to be one of more than more than 40,000 who made the journey. Since this was the fiftieth anniversary of Buffett acquisition of BRK, it is likely that there were more than the usual number of first-time attendees. The crowd filled the arena at CenturyLink, a 1.1-million square-foot facility that includes an 18,975-seat arena, a 194,000 square-foot exhibition hall, and 62,000 square feet of meeting space. For the BRK meeting, there are also floor seats. In addition to filling the main arena, the crowd took over two spillover rooms in CenturyLink as well as two more in the Hilton Hotel across the street.
Seating at the meeting is first-come, first-served. This year, I decided to arrive very early and wait in line with a group of friends. I pulled in around 4:30 AM (doors open at 7:00 AM). We were able to get floor seats in the center section around 20 rows from the stage where Buffett and Munger sit. The meeting started at 8:30 AM with a video that can only be seen by attendees. It primarily highlighted products sold by BRK’s subsidiaries and equity investments. It also paid homage to the company’s managers.The equivalent of a trade show also took place in CenturyLink’s exhibition hall. It helps the company generate tens of millions in revenues. For the first time this year, the exhibition hall opened on Friday at noon. There was a line of people waiting to get in before the doors opened.
SOME Q&A HIGHLIGHTS
During the Q&A session, Buffett and Munger shared their views on investment-related topics as well as life in general. Among the more memorable discussion points from this year’s meeting were the following:
Through its investments and/or ownership of companies such as Coca-Cola, Heinz and See’s Candies, one could say that BRK is essentially long sugar consumption (i.e., BRK owns stakes in companies with sugar-rich products). When asked what impact changing consumer preferences toward sugar consumption might have on BRK, Buffett responded that he does not expect anything revolutionary. Companies will adjust to the preferences of consumers. He thinks that 20 years from now there will be more Coke cases consumed than there are today. He went on to state that he is “one-quarter Coca-Cola. … If I had been eating broccoli and Brussels sprouts, I would not have lived as long.” Munger joined in by saying “Sugar is an enormously healthy substance. It prevents premature softening of arteries. If I die a little earlier, it will help me avoid a few months of drooling in a nursing home.” Clearly Buffett and Munger are not big fans of the trend toward healthier eating.
On August 30, Buffett will be 85 years old. Munger turned 91 on January 1. With each passing year, the question of who will manage BRK when Buffett and Munger are gone becomes more prominent. Given BRK’s size and scope, the questions go beyond leadership; they extend to wondering about the company’s fate as well. As discussed in more depth in Lawrence Cunningham’s book Berkshire Beyond Buffett (see http://www.bwfa.com/articles/april-2015/book-review-berkshire-beyond-buffett/ for a review), the company appears well positioned to survive, if not thrive, for many years. The strength of the company’s culture is one of the primary factors driving this belief. Buffett thinks BRK’s culture is clearly defined and embedded in both the company and its subsidiaries. It even extends to the shareholders. “It has gotten reinforced over the years. People believe in it. … It is self-reinforcing. The Berkshire culture will continue for decades and decades to come. It is institutionalized.”
When asked how BRK has built its culture, Munger suggested that it is all about “behaving well as you go through life.” Buffett added, “Over time, you get the reputation you deserve. … I believe it is the same for companies.”
In our weekly economic updates, we often discuss how difficult it is to make economic forecasts. Buffett made it clear that BRK will “never make an acquisition based on macro factors.” His reasoning is that “we [Buffett and Munger] know we do not know.” Worrying about the global economy and the direction of interest rates is stressful and these are not factors we can control. It is better to do as Buffett and Munger do: focus on what you can predict and control.
Buffett and Munger also opined on the staying power of the US as a global power. They agreed that China was likely to be second to the US over the coming decades. Buffett also commented that he believes the US dollar will still be the global reserve currency in 50 years.
OTHER REASONS TO ATTEND
There is nothing like being at the BRK meeting and getting to hear the thoughts of Buffett and Munger in a live forum. An added benefit of being there is listening to Munger’s dry sense of humor. His one-liners, such as this comment about selecting a spouse – “Look for someone with low expectations” — often drew considerable laughter.The other benefit of attending the meeting is the opportunity to meet with and talk to many like-minded investors. These discussions can lead to the research of potential new stocks for inclusion in client portfolios. In addition, expanding my network increases the number of individuals with whom I can discuss specific stocks or investing throughout the year. This year I added many individuals to my network. These aspects of the meeting are invaluable to me personally as well as to BWFA and its clients. I look forward to attending the BRK meeting again next year.