This year’s Berkshire Hathaway AGM was like no other we’ve seen before, and likely will ever see again. Not only was it performed to an empty stadium, but even Charlie Munger didn’t make the meeting. Buffett assured investors though, that his 96-year-old business partner is in “fine shape” and that “his mind is good as ever”. Munger’s absence has nothing to do with his health, but is simply a risk management measure in light of COVID-19.
“He’ll be back next year.”
In his place was Greg Abel, Vice Chairman in charge of Operations (excluding Insurance). Abel appears to be following in Munger's footsteps; more than two hours into the meeting he spoke for the first time after Buffett asked if he had anything to add. “Really nothing to add Warren”, was the response. Having him on stage, rather than Ted Weschler, Todd Combs, or Ajit Jain, seems to lend weight to the idea that he’ll be the successor. For what it’s worth, my suspicion is that Jain and Abel will lead the company together, in much the same manner that Buffett and Munger have.
In this wire, I summarise some of the points that stood out to me from this year’s AGM. You can watch the full meeting on Yahoo Finance here.
Buffett’s comments on the pandemic and the economy
Buffett was highly complimentary of Dr. Anthony Fauci from the White House’s COVID-19 taskforce, but he made a point of avoiding discussion on Trump and the White House’s actions.
“When we start on this journey – which we didn’t ask for – it seemed to me there was an extraordinarily wide variety of possibilities on both the health side and the economic side… But I do think the range of possibilities has narrowed down somewhat (for the health outcomes). We know we’re not getting the best case, and we know we’re not getting the worst case… The range of possibilities on the economic side are still extraordinarily wide. We still do not know exactly what happens when you voluntarily shut down a substantial portion of your society. In 2008-2009 our economic train went off the tracks… This time we just pulled the train off.”
Buffett said he was concerned about the effect the pandemic could have on people's psyches, potentially having long-lasting effects on their behaviors and preferences.
He was also concerned that some of Berkshire’s operating businesses would have depressed earnings for a considerable period of time. Likely into next year, and maybe even longer.
“It hurts some of our businesses a lot. It affects others much less. Our three major businesses are in a reasonably decent position.”
In typical Buffett fashion, he spent quite some time warning people not to worry about stock prices and telling them that America will continue to excel. Drawing on the old anecdote of Mr. Market the erratic versus the farm owner.
“Stocks have this enormous advantage of people yelling out prices all the time to you. Many people turn that into a disadvantage… With stocks, people bring the attitude to them too often that because they are liquid and quoted minute by minute, that it’s important that you develop an opinion on them minute by minute. That’s really foolish when you think about it.”
Berkshire's 9-figure cash pile continues to grow, despite the sell-off in February and March. Interestingly though, Buffett didn’t seem to think this was an overly large balance, given the possible worst-case scenarios they could face in the event of a major natural disaster. As the largest re-insurer (i.e. they provide insurance to other insurers) in the world, they could face serious liabilities if a large hurricane or earthquake were to strike.
Is Berkshire buying stocks?
Last week, I asked the question, “is Berkshire buying stocks?” It seems we now have a very clear answer – Berkshire’s a net seller. In Q1 2020, they sold US$4B in equities, buying another US$2.1B inequities, and US$1.7B in Treasuries.
But the big news came on the next slide. Buffett prefaced it with a warning; “I’ve added another figure that I wouldn’t normally present to you, but I want to be sure that if I’m talking to you about investments and stocks more than I usually am, I want you to know what Berkshire’s actually doing.”
The airline business has changed in a major way
“That isn’t because we thought the stock market was going to go down… I just decided that I made a mistake (in buying the airlines).”
The primary reason for the large selldown in April was a complete exit from the airline stocks. They had paid around US$7-8B for a roughly 15% stake in the four biggest airlines in America – American Airlines, Delta Airlines, Southwest Airlines, and United Continental. They thought they were buying approximately a billion dollars’ worth of underlying earnings for that amount, but of course, that’s all changed now. Buffett was complimentary of the management teams at the airlines he’d owned and emphasised the point that this was due to uncertainty about demand for flights over the medium term, not due to a mistake any company had made. Apart from this, airlines are also racking up billions of dollars of debt in the meantime.
“I don’t know whether, two or three years from now, if many people will fly as many passenger miles as they did last year… The future is much less clear to me.”
Later, during the Q&A session, Buffett made the point that there may be too many planes in the world when this is all over. This could spell tough times ahead for Berkshire-owned Precision Castparts, but of course, also Boeing and Airbus.
“I don’t know what their future is. We’re gonna have aircraft, we’re gonna be flying. The real question is whether you need a lot of new planes or not.”
Where are all the deals?
“We’re willing to do something very big. You could come to me on Monday morning with something that involved thirty, forty, or fifty billion dollars and if we really liked what we’re seeing, we would do it.”
Why haven’t they done it then? Well, they’re just not getting attractive deals on their desk yet.
Buffett said the Fed’s quick action injecting liquidity into markets meant that many companies had been able to raise significant amounts of capital to get them through this crisis. Some major companies had even come to market twice. He said even Berkshire had raised additional capital, even though they don’t need it, just to be safe.
But with all this cheap money available, there’s been little need for Buffett’s cash. So for now, they’re happy to keep their balance sheet like “Fort Knox”.
When Warren and Charlie are gone
We’ve heard both Buffett and Munger address questions about how Berkshire would survive in their absence before. What stood out about this was the Greg Abel immediately jumped in to answer the question – which was the first time he’d done so in three hours on stage. A shareholder asked whether Berkshire would be able to respond to market crises and write the big deals, like Buffett did during the GFC.
Abel said that he does not expect the culture at Berkshire to change at all when Buffett and Munger are longer at the helm. He said they’d continue to have the skills to assess transactions and act on them quickly, with or without Buffett.
The US government won’t default
While some people may be concerned about the ballooning government debt around the world, Buffett says there’s no need to worry as long as the debt is issued in the country’s own currency. Good news for the US and Australia, not so good for Europe and developing nations.
“If I could issue a currency Buffett Bucks, and I had a printing press. If I could borrow money in that, I would never default.”
He does acknowledge that purchasing power and exchange rates could be affected. Though he’s been worried about inflation before, and said he was wrong over the last 10 years about how much ability we had to print money and lower rates without creating inflation.
He believes if rates stay low or negative for a long time, equities are a better place to be than debt (surprise surprise).
Wrapping it all up
The full event was nearly six hours long, so this really only covers a small fraction of what was discussed. The last question of the day seemed like an appropriate note to finish on though.
In response to a question asking about people’s loss of faith in capitalism, Buffett said,
“The market system works wonders, but it’s also brutal if left entirely to itself. We wouldn’t be the country we are if the market system hadn’t been allowed to function. To some extent you can say that countries around the world have improved their way of life dramatically, to some extent by copying us. But it needs government. It is creative destruction, but for the ones who are destroyed it can be a very brutal game… I do not want to come up with something different to capitalism, but I certainly do not want unfettered capitalism.”
The full video can be watched on YouTube here.
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Interesting to know that even at much lower prices in March and during April, and despite having a very large amount of cash, Buffett hasn't been a net buyer. Acknowledgement given of long lasting effects and uncertainties.
For sure Jerome. I think it's also that prices recovered so far and fast that any value that may have briefly existed evaporated with a wave of the Fed's magic money wand. As Munger pointed out in the WSJ (and Buffett repeated yesterday) - nobody had been knocking on their door with attractive deals anyway,.
Thanks Patrick, an informative summary. "Buffett says there’s no need to worry as long as the debt is issued in the country’s own currency. Good news for the US and Australia, not so good for Europe and developing nations" I think maybe Eurpoe will be OK. The ECB so far has printed euros/bought debt from pretty much any member nation that wanted to raise capital. Ax long as it keeps on doing that, EU member nations will have access to limitless capital as if they were printing it. The separate questions of whether that is an equitable practice between member nations, or a wise financial thing to do, remain to be seen.