he US economy faces a series of major challenges: poorly protected regional banks, persistent inflation, and the possibility that the United States will default on its sovereign debt obligations. These are all potential problems, of course, but if you get a sense of déjà vu, it’s because they’ve all been obstacles we’ve already encountered. As contract killer Jules Winfield said in the 1994 movie Pulp Fiction when he confronted an armed robber: “I hate to smash your ego, but this isn’t the first time a gun has been pointed at me.”
Optimism is not unjustified. Inflation has been moving in the right direction, and if the Fed refrains from raising more or even cutting rates, it will help the yield curve flatten and stock valuations rise. On the debt ceiling, partisan brinksmanship has always ended with a last-minute deal that prevents Treasury from bouncing checks. Neither party wants to lose the ability to spend money.
Optimism in the upward trajectory of corporate America has made Buffett and Munger exceptionally wealthy. At this year’s Berkshire collusion, both nonagenarians showcased their sharp intellects, deep wisdom and all-knowingness of today’s world of business and investment, delving into discussions of the slowing economy, the impact of artificial intelligence, the future of value investing and how to live a rewarding life without regrets.
Investment experts from Central America
Buffett and Munger grew up in Omaha, but never met face-to-face until a dinner party in 1959. At the time, Buffett was managing money and still fresh out of Columbia University, where he studied, and later worked, with pioneering professor of value investing, Benjamin Graham. Munger was putting his Harvard law degree to work in southern California, a place he grew to love in 1943, when the US Army Air Forces sent him to Caltech to study meteorology.
Below are some of the highlights and important questions from the Berkshire meeting. Warren Buffett began with an overview of the company’s last quarter and year, providing insight into the many businesses that Berkshire owns in whole or in part.
Warren Buffett : We reported first-quarter operating earnings of a little over $8 billion, and when we talk about operating earnings, we basically mean Berkshire Hathaway’s earnings excluding capital gains, both realized and unrealized. We expect to earn capital gains over time. Why would we own the shares any other way? It doesn’t always work, but it generally works pretty well over time, but on any given day, any quarter, any year, even occasionally, over a five-year period, stock prices move capriciously. We consider these shares businesses. We own many other businesses, and their value does not change.
In the month of April, we probably added about $7 billion to Treasury bills. We bought about $400 million worth of shares in April, but we sold some shares that produced maybe $4 billion. I would say that the economy in general, and perhaps most of our companies, will report lower earnings this year than last year. Businesses have left the incredible period, which is as extraordinary as what I’ve seen in business since World War II, where the government handed out a lot of money to people who couldn’t get goods. It was more extreme in World War II, but this time it was extreme.
Optimism in the upward trajectory of corporate America has made Buffett and Munger exceptionally wealthy.
It was just a matter of getting the products delivered, and people buying, and not waiting for the sales, but that period is over. It hasn’t ended with jobs falling off a cliff or anything, but it’s a different climate than it was six months ago. Our managers were shocked. Some of them had too much inventory on order, then all of a sudden they were delivered and people weren’t in the same frame of mind as before. Now, we will start to have sales where before we didn’t need to have sales.
Even though I think overall this year will be slower than last year, we’re actually positioned so I expect our investment income to be much higher this year than last year. We have $125 billion or so in very short-term investments. Believe it or not, not too long ago, we got 0.04%, which is next to nothing on that $125 billion. We were getting $50 million a year, but the other day, because of a weird twist in the market due to doubts about the debt ceiling, we bought $3 billion of bills at a yield equal to 5.92%, like this that we are in a position where the investment income will surely increase quite a bit.
Buffett is a big fan of the insurance business for a number of reasons, including the fact that it is non-cyclical and, more importantly, generates huge amounts of cash in the form of “float.”
W.B .:Float is money that remains in our hands, but very important, it is different from a bank deposit. You have to pay interest on your bank deposit, and you have to pay more interest these days. You also have to manage a bank and do a lot of things. Just think of a balance. You have liabilities here and assets here, and the liability side funds the asset side. It is very simple. Owners’ equity funds it, long-term debt funds it, and so on, but owners’ equity is very expensive in a real sense. Long-term debt has been cheap for a while, but it can get expensive and it can also eventually mature and become unavailable. Float is a liability, but it hasn’t cost us anything and can’t go away quickly, and it funds the asset side in the same way as shareholders’ equity.
Insurance underwriting does not correlate with business activity. It depends on things like hurricanes and earthquakes and other events. On a probability basis, we are likely to have a better year in insurance underwriting this year than last year. It is simply not affected by the economic cycle. I would expect, but cannot promise, that our operating profit will be higher than last year. A massive earthquake or hurricane in the wrong place could affect that prediction.
Buffett is famous for not paying dividends on Berkshire Hathaway stock, but investors rightly appreciate leaving the money in Buffett’s hands rather than their own. Although he doesn’t pay dividends, Berkshire rewards shareholders with share buybacks.
W.B .:We don’t pay dividends, if we pay dividends and you reduce your dividend try to fiddle around trying to write next day insurance. I mean, it’s a business where people count on you to pay. Look at Berkshire’s outstanding shares and you’ll notice that each year the number of our shares decreases. So if we own more businesses and the businesses make more money, their share, as shareholders, as owners of Berkshire, increases every year without them shelling out any money. Now, the alternative is that you could receive dividends, but the reason we got to where we are is because we kept the money. We pay an early dividend of US$0.10 per share. It was a terrible mistake. We have reinvested and that has produced more than $500 billion of shareholder capital and more than $30 billion of operating profit. Us’
Q – Mr. Buffett, Mr. Munger, you seem to have found the sweet spot between being too conservative and being too aggressive as investors. Do you ever make bad investment decisions because of your emotions? And what do you do to try to prevent that from happening?
WB : Well, a lot of times we make bad investment decisions. I make more than Charlie because I like to think it’s because I make more decisions, but I don’t remember a time in Berkshire’s history where we made an emotional decision. That’s business we’re talking about. You don’t want to be emotionless throughout your life, but you definitely want to be emotionless when making an investment or business decision.
As AI and robotics continue to advance, what do you think will be the positive and negative impact of this technology on both the stock markets and society in general?
Charlie Munger : We’re going to see a lot more robotics in the world, but personally I’m skeptical about the hype that has been given to artificial intelligence. I think old-fashioned intelligence works pretty well.
WB : You can do amazing things. Bill Gates brought me the latest, maybe not the latest version, but he thought I could handle it, and he did these remarkable things, but he couldn’t tell jokes. When something can do all sorts of things, I worry a little because I know we can’t uninvent it. We invented the atomic bomb in World War II for very good reasons, but is it good for the next 200 years of the world that it has broken loose? Einstein said after the atomic bomb that it changed everything in the world except how men think. I would say the same about the AI. It can change everything in the world except how men think and behave, and that is a big step to take.
Q: Given the rise of disruptive technologies that can significantly improve productivity, and AI is one of them, how do you envision the future of value investing in this new era and what adaptations or new principles do you think investors should embrace and recommendations for investors? to continue to succeed in this rapidly changing landscape?
CM : I think value investors will have a harder time now that there are so many of them competing against a narrow set of opportunities, so my advice to value investors is to get used to earning less.
WB : I would say there will be a lot of opportunities. The world is changing but new things do not take away opportunities. What gives you opportunities is other people doing stupid things, and I would say that in the 58 years that we’ve been running Berkshire, there’s been a huge increase in the number of people doing stupid things and doing big stupid things. The reason they do it to some degree is because they can get money from other people much easier than when we started, so you could start 10 or 15 dumb insurance companies in the last 10 years, and you could become rich if you were clever . on it, whether the business is successful or not. In 1965, you couldn’t get the money to do some of the stupid things we wanted to do, thankfully.
New things don’t take away opportunities. What gives you opportunities is other people doing stupid things.
CM : There is so much money now in the hands of so many smart people, all trying to outsmart each other and get more money from other people. It’s a radically different world than the world we started out in. I suppose it will have its opportunities, but it will also have some unpleasant episodes.
WB : The world is overwhelmingly focused on the short term. I would love to be born today and go out without too much money and hopefully turn it into a lot of money, and Charlie would too. He would find something to do. He’ll guarantee it, and it wouldn’t be exactly the same as before, but he’d have a big, big, big stack.
CM : I wouldn’t like the thrill of losing my big stack to a small stack. I like my big pile just the way it is.
WB : We agree on that by the way.
CM : Yes, we do. We are the most extreme lovers of the big pile.
Q: What do you think about a pervasive problem in the world of estate planning, which is that most parents don’t prepare the next generation for the inheritance that comes their way?
WB : I have observed many rich families, and the problems are very particular to the family. In my family, I don’t sign a will until my three children have read it, understood it, and made suggestions. Now, my children are 60 years old and that would not have been a great success if I had done the same thing in my 20s. It depends on the family. It depends on how the kids feel about each other and all sorts of things. When they were four, one of the kids pulled the other kid’s cat’s tail or something. I mean, you’re dealing with human beings, and the most important thing you want is for your kids to get along and they want that for your whole life. I know of several cases where people didn’t know what was in the will, there were large sums involved, and in about 15 minutes,
I do believe that if the children are older and when the will is read to them it is the first thing they find out what the deceased thought about things, the parents have made a tremendous mistake. I have come across all kinds of situations, and some people don’t tell their children anything, and some of them try to make them bend to their will using their own personal will. They make a million mistakes and that’s one you can’t fix. It is important to handle it well. And it’s important that if you want your children to have certain values, it’s important that you live those values. It is important that you talk to them or they are learning from you from the day they are born, how you really are.
I don’t think a skillfully crafted will is a substitute for your own behavior in teaching your children the values you expect them to have. Your will must be in conjunction with that. Charlie and I have said it. If you want to figure out how you want to live your life, you write your obituary and reverse engineer it.
Q: Greg Abel and Ajit Jain are the next generation of Berkshire leaders. Who are currently behind Greg and Ajit and their respective roles?
WB : Those are not easy questions. Everybody talks about the executive bank and that kind of thing, which is nonsense. I mean, they don’t have as many people as the largest GAAP net worth company and all kinds of miscellaneous businesses, but you don’t need five people either. You need a lot of good operating managers, and you need someone at the top to allocate capital and make sure you have the right operating manager.
CM : We have a lot of good people who have come up through Berkshire subsidiaries, and there are reasons why our operations, in general, have done better than other large conglomerates. One of them is that we change managers much less frequently than other people, and that helped us.
Q: You reminded us not to bet against the United States. What do you think are the most important things for America to stay strong?
WB: Well, we are such a young country. It’s amazing how new we are on the block. I mean, 234 years since we started, that’s nothing. Charlie and I together have lived two-thirds of the life of the country. We have been tested in 46 national elections, we have made some bad decisions and we have a Civil War. The country has had enormous advantages, yes, in a way, because we started with 1.5% of the 1% of the world’s population in 1790, and now we have something close to 25% of the world’s GDP. It was nice to have two oceans on either side when people were trying to rule the world by ruling the waves, and we had good neighbors in Canada and Mexico, but it’s a miracle.
My father was in Congress in the 1940s and he seemed like a mess then. He was unified by the war to some degree, but he was still very partisan. Now the problem we have, I think, is partisanship. It seems to be his move towards tribalism, and tribalism just doesn’t work that well. When it comes to tribalism, we don’t even listen to the other side, and tribalism can lead to mobs, but if I could choose anywhere in the world to be born, I would want to be born in the United States. , and I would like to be born today. It’s a better world than we’ve ever had.
We need to think of different solutions in terms of how to solve important problems. So far, it doesn’t look very promising, but I’m sure when Lincoln saw what was happening in the Civil War, he didn’t look very promising either. The challenges are enormous, but I believe the US is capable of remarkable things, and I wouldn’t be surprised if we do it again.
Berkshire Hathaway: a compelling value
If you appreciate Warren Buffett’s value investing practice and his long track record of making money and beating the market, it makes sense for you to buy shares in the company he runs. Berkshire Hathaway is a holding company that can be viewed as a kind of mutual fund or ETF with a value that corresponds to the financial performance of investments and businesses that Warren Buffett and his lieutenants consider worth buying. Berkshire owns dozens of companies, including GEICO, Burlington Northern Santa Fe, Duracell, and Dairy Queen, and owns massive non-controlling stakes in nearly four dozen public companies including Apple, American Express, Coca-Cola, and Kraft Heinz. Apple is the largest holding company, accounting for more than 40% of Berkshire’s stock portfolio. Although Berkshire does not pay dividends on its shares,
Berkshire Hathaway (BRK.B)
Perhaps the jewel in Berkshire’s crown is its GEICO insurance subsidiary, which it bought in 1996. Second only to State Farm in auto insurance business, GEICO collected $40 billion in premiums last year, representing the 13% of Berkshire’s revenue. Buffett’s intelligence is reflected in how he has been able to amplify his profits by investing the constant cash flow generated by insurance companies. At the end of the first quarter, Berkshire had $165 billion of so-called “float.”
Total revenue this year is expected to rise 6.6% to $321.9bn, with earnings growing 16% to $16.22 per share in Class B shares. Berkshire are trading above $490,000 per share. In 1996, Berkshire created a lower property designation by issuing Class B shares, also known as “Baby Berkshires.”
Buffett personally owns 38.5% of Berkshire Hathaway, a stake valued at $112.1 billion. Billionaire investors are homeowners too . Clifford Asness’s AQR Capital owns 823,000 shares of BRK.B, and Israel England’s Millennium Management owns 275,000 shares, 212,000 of which it bought in Q4 2022. Mario Gabelli’s GAMCO has a position of 118,000 shares.
