The Old Market area of Omaha, harks to an earlier time, with its cobbled stone roads and old West architecture. It is the largest city in Nebraska today, and as “The Gateway to the West” it grew with the railways and today it is still home to the headquarters of Union Pacific the largest railroad company in the United States. It is also well known for cattle farming. Indeed, no visit to Omaha is complete without having a Nebraska steak (and yes, I might have done so a few times).
However, the railroad and agriculture are not the only industries coursing through Omaha’s veins today. For one day only, at the start of May every year, investors from all over the world descend upon the city, including myself for the past few years. They come to hear from the Oracle of Omaha, Warren Buffett and his business partner Charlie Munger at the Berkshire Hathaway shareholders meeting to talk how the past year has impacted the business. The stadium has a capacity of nearly 18,000 people and was nearly full to the brim for the 2019 meeting which took place today.
As in previous years, the event started with a brief summary of BRK’s performance over the past year, and was followed by numerous questions asked by journalists, analysts and members of the audience, which both Buffett and Munger do not know in advance. Buffett noted that it was better to focus on operating earnings, rather than quarter to quarter capital gains. Whilst these are very important over the long term, Buffett noted that they aren’t predictive over a shorter term basis such as a quarter or on an annualised basis. Indeed, this is often a problem when trading, trying to decipher the short term noise from a longer term signal. Is short term deterioration in performance simply a manifestation of noise rather than something more fundamental?
Many questions revolved around Berkshire Hathaway’s repurchase of its own stock, in particular, why hadn’t the firm acquired more of its own stock recently, given the amount of cash it was holding. Buffett pointed out that he was very willing to spend a lot more. However, the caveat was that the stock had to be trading at a level which he felt was below what he thought was its intrinsic value. Munger, predicted they would get more legroom to repurchase stocks. In a sense, one constant theme throughout the day, was that Berkshire Hathaway’s large amount of cash was difficult to deploy, given the size potential targets could be. One area where Buffett was interested in investing was in the UK and Europe more generally. He recently agreed to do an interview with the FT, he said, to help spread the message in the UK and Europe. The message was that if large firms in the area were willing to be sold, to consider calling Berkshire Hathaway, in the same way that US firms would usually do so. Buffett noted that whilst he was not an Englishman, he had the feeling it was a mistake to vote to leave. Munger chimed in saying Brexit was a horrible problem, and he was glad it didn’t involve him. At the same he was keen to deploy capital to the UK and Europe no matter how Brexit played out. In general, Berkshire Hathaway likes to buy businesses which are protected by a “moat” from their competitors, which are in dominant position in their sector.
Berkshire Hathaway is a major shareholder in Wells Fargo, which has recently faced a scandal related to the opening of fake accounts and there was unsurprisingly a question about this. Buffett said the key point was that bad behaviour such as this could not be eliminated, however, it was important that as soon as such conduct was discovered, it was important to rectify the situation. If you’re in the top job, he noted, you have to do something fast. Berkshire Hathaway has a number of ways to encourage whistleblowers to come forward.
Another round of difficult questions concerned the Kraft-Heinz deal which Berkshire Hathaway did alongside their partner 3G. Buffett noted that they had paid too much for Kraft, after Heinz. Whilst it was a profitable business, you can still pay too much for a wonderful business, he continued. He noted how there was different dynamic between retailers and brands, citing the example of Amazon which has become a brand and also Kirkland the inhouse brand of Costco. Retailers like Amazon, Costco and Walmart had acquired power at the expense of brands such as Kraft-Heinz.
As ever, there were discussions around leverage, with Buffett noting how as a firm Berkshire Hathaway didn’t typically run with a huge amount of leverage. He said he had seen many high IQ people destroyed by leverage, giving the example of LTCM, which blew up in 1998. Ultimately, risk is tricky to measure, and simply not observing it, doesn’t necessarily mean there isn’t risk (ie. Black Swan idea).
However, Buffett stressed he wasn’t a big fan of trying to quantify risks with spreadsheets. Yes, when underwriting large policies (for example, around natural disasters), you can look at historical data, but in some instances, there is very little data to look at. The key was to make sure that max losses were capped though in a worst case scenario.
One of the major areas of Berkshire Hathaway is the auto insurance business, Geico, and it provides a float for the firm. Buffett said he was more concerned about competitors like Progressive, than auto firms trying to get involved in the space such as Elon Musk’s Tesla.
There were numerous questions about more general investment strategy, such as whether it was necessary to specialise or to have broader knowledge. Buffett noted that of there was an area that he didn’t know much about he wouldn’t try to get into it. Tech has historically been such an area, although in recent years, Berkshire Hathaway has now got exposure to Apple. Whilst, he wasn’t upset about missing Amazon, one mistake, Munger did feel they made was not investing in Google earlier. They had insights into Google, given that Geico had been a client using Google Ads, however, they ended up “sucking thumbs” and missing the opportunity.
In response to a question, more broadly Buffett, noted that investing was definitely more competitive than when he started. If he found an area like insurance, he felt he could get, he would dig into it and this is something investors should do. Very often his research involved visiting libraries to research stocks, and in some cases very few other people used the resources. Obviously today, information does flow more freely, given the advent of better technology and in particular given the internet. However, even today, information is not universal. Not all information is known by everyone in the market, if we for example consider alternative data, which can be used to gain an informational edge.
And one final question, will I be back in Omaha next year? I certainly hope so!