Investors pay homage to the Sage of Omaha
Berkshire Hathaway’s AGM resembles the end of a pilgrimage, but even seers can get it wrong
THE sign at the door of the Berkshire Hathaway AGM read “No weapons of any kind”. It was oddly comforting. At the Scheels sporting goods store, not far from the where the AGM was being held in downtown Omaha, Nebraska, you can buy firearms — from handguns to assault rifles — with little trouble, as long as you have a US ID.
As far as stereotypes go, buying firearms at the equivalent of a Cape Union Mart ranks high on the list.
Fortunately, Berkshire Hathaway shareholders come armed only with curiosity and a desire to learn at the feet of the world’s most successful investors.
The sweet-looking octogenarian with whom I have been queueing and making idle chitchat for two hours outside the venue for the 52nd Berkshire Hathaway AGM didn’t need a weapon. When the doors finally opened, she skipped ahead at least 16 places with panther-like agility, elbowing through a crowd equally eager for prime seating within sight of their idol, self-made billionaire investor Warren Buffett — the Oracle of Omaha.
There is no reserved seating, other than for a small group of VIPs.
The meeting starts with what Buffett calls “the movie” — a charming mix of snappy ads for Berkshire Hathaway brands and companies, interspersed with spoof clips of Buffett singing with ageing crooner Paul Anka and being filmed “doing a deal” with cast members of Breaking Bad, who instead of cooking up crystal meth, produce one of the billionaire’s favourite snacks: peanut brittle.
Buffett’s longtime business partner and investment muse, Charlie Munger, 93, gets to meet the cast of Desperate Housewives in an innuendo-laden clip to show that even the pigeonchested nerd gets the girls eventually. If he is rich enough.
“I’m Warren. He’s Charlie. You can tell us apart. He can hear and I can see,” quipped Buffett, 86, at the start of the AGM, setting a relaxed tone for the next seven hours during which he and Munger, as founders of one of the five biggest Fortune 500 companies in the US, take questions on everything from their investment decisions to what they are doing about governance failures at some of its biggest investments.
Berkshire Hathaway is a complex conglomerate worth more than $400-billion (about R5.3trillion) which holds meaningful stakes in companies as big as Apple and Coca-Cola and owns others outright.
It runs a decentralised model, putting faith in well-incentivised teams to ensure the holding company keeps delivering on its promise to outperform the returns on the S&P 500 — something Buffett has continued to deliver despite the market’s in- flated levels in recent months.
For all of the levity and selfdeprecating charm, pressures are being brought to bear. Buffett neatly dodged accusations by an activist, who was smartly escorted off the premises, about the social impact of some of his investments. What about the health consequences of his 10% investment in Coca-Cola? What about the low wages workers are paid as shareholders in Berkshire Hathaway pocket $670-million in dividends in a company that has seen its share price rocket 13 times since Berkshire made its initial investment?
Buffett replies with grandfatherly charm that he drinks five cans of the stuff a day, and it’s up to him as to how he gets his calories. There are no followups and he dodges the bullet.
Beneath the charming exterior is an uncompromising steeliness in his approach to investing. It is demonstrated by a video played annually of Buffett giving evidence before a congressional committee after allegations of financial impropriety at a big investment: Salomon Brothers. Buffett appealed for the full power of the state to be used to investigate Salomon — winning him universal respect.
This time he was dealing with questions around the incentive structures at Wells Fargo, a bank in which Berkshire Hathaway is heavily invested, where staff created millions of accounts because they were rewarded for account volumes.
Buffett fumed: “At Wells Fargo, there were three significant mistakes, but one dwarfs all of the others . . . you have to be careful what you incentivise. There was an incentive system built around cross-selling . . . that was incentivising the wrong kind of behaviour.”
He has no patience with those who tarnish their own reputations and his. “You can lose money,” he famously said after the Salomon Brothers debacle, “but if you lose just a shred of reputation, I will be ruthless.”
With all the hype around Buffett and Munger it’s hard to think they ever make mistakes.
They do. Plenty of them. On the Friday before the AGM, Buffett revealed he had reduced the company’s stake in IBM by a third, stressing that while Berkshire had not lost money, the investment had not performed according to expectations. Other mistakes included being single-minded in its aversion to technology shares. While it served Berkshire well as share prices collapsed with the dotcom bubble, the company missed great opportunities, including Google and Amazon.
Buffett knew his insurance company Geico was paying Google $10 every time someone clicked on a Google advert for the brand at no cost to the search engine itself. It was reliable, easy income. When it came to Amazon, Buffett again turned it down because he did not believe that founder Jeff Bezos could execute his complex strategy. Buffett and Munger openly admit they “blew it”.
Munger said: “The investment world has become more complicated. We can’t bring back the low-hanging fruit; we will have to reach for the higher branches.”
It’s causing the pair to consider investments neither would have countenanced a decade ago. They are dipping into technology via a stake in Apple, which this week became the first firm in history to have its valuation pass the $800-billion mark, and the firm is an investor in all four of the US’s biggest airlines. Just over a decade ago Buffett famously quipped that if Orville had shot down Wilbur Wright at Kitty Hawk, they would have saved investors in airlines billions over decades. The investment case is different now, he argues.
Buffett wants to do at least one more big deal. He has nearly $100-billion at his disposal and is allergic to letting money fester in the bank.
He tried earlier this year to buy Unilever with the help of Brazil’s 3G Capital, the force behind the 2016 Anheuser- Busch InBev takeover of SABMiller.
Putting aside criticism of the firm’s reputation for cutting jobs, Buffett revealed that both Berkshire Hathaway and 3G had been willing to invest $15-billion each to allow Kraft Heinz to do a friendly deal, but when the independent directors at Unilever resisted their approach, they walked away.
Buffett, though, remains eager to do deals with the Brazilians, who share his thrifty approach to investing and extracting value from companies.
Buffett and Munger have built their wealth through taking calculated risks and investing directly in companies, and holding those shares for a long time as they continue to hold a competitive advantage in their respective markets.
In the VIP section this year was the founder of Vanguard Capital, Jack Bogle, who turned 88 on Monday. Buffett quipped he was now the right age to become a Berkshire Hathaway director.
Buffett has instructed the executors of his estate that 90% of his wife’s inheritance should be invested in index trackers such as those offered by Bogle as most fund managers routinely underperform the S&P 500.
Oddly, for a man revered as the “Oracle of Omaha”, there is little sign that one of the richest people in the world is a resident. Even the Berkshire headquarters gives no indication that one of its inhabitants is the legendary investor whose fiveminute commute from the home he bought for $31 500 in 1958 in a car with the personalised number plate “Thrifty” has earned him a global following.
As markets continued this week to break multimonth resistance levels, there is a growing sense that one of the longest bull markets in living memory has to be running out of steam. Munger is unconcerned and almost seems to be willing a pull-
I’m Warren. He’s Charlie. You can tell us apart. He can hear, I can see You can lose money, but if you lose . . . reputation, I will be ruthless Unless there is some kind of dirty bomb or a nuclear attack, we will be fine
back to allow for investment at levels where they can feel more confident of getting a return. For now, though, both he and Buffett are comfortable that their portfolio will be resilient in the face of economic hardship.
“Unless there is some kind of dirty bomb or a nuclear attack that kills millions of Americans, we will be fine. If there is, well, then we will have more serious things to worry about than Berkshire Hathaway’s stock price,” Buffett mused, characteristically dismissing concerns about the impact artificial intelligence will have on some of their investments. “I don’t think we’ll be around to see it,” he says. A hospital pass to his successors, who, a bit like Prince Charles waiting for the throne of the UK, must be wondering when their turn will come.
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