Buffett offers spritely sage’s advice
WARREN Buffett presided over his 51st Berkshire annual meeting in Omaha this weekend during which he and vice-chairman Charlie Munger fielded more than five hours of questions on such matters as Coca-Cola’s sugary drinks, risks from derivatives and the need for money managers.
Buffett told shareholders that some of the keys to successful investing are avoiding envy and costly fees.
“You don’t want to get envious of somebody who bought an IPO (initial public offer) or won a lottery,” Mr Buffett said. “You have to do what makes sense to you.”
That kind of advice — and the opportunity to attend while the 85year-old Buffett and 93-year-old Munger are still leading the company — are part of what keeps people coming back to the annual meetings.
Buffett’s single-biggest piece of investment advice: “Don’t pay for investment advice, buy a low-cost S&P 500 index fund instead.
“The basic idea is that, while there are some people who might be good investors, there’s no way to identify them. So, don’t even bother.”
As usual, Munger was more erudite, saying things like: “If you see the world accurately, it’s bound to be humorous because it’s ridiculous.”
Other Mungerisms were: “Now that I’m 92, I still have a lot of ignorance left to work on”, “Microeconomics is what we do and macroeconomics is what we put up with”,“We try to avoid what is always the worst anchoring effect ... our previous conclusions”, and “I have all the enemies I can afford at the moment”.
Here is a little more of what the pair had to say on …
The shift from what a shareholder called “push to pull marketing”.
“It’s huge, really huge,” said Buffett on the issue. “What (Amazon) has accomplished in a really short period of time is remarkable.… Charlie and I are not going to out-Bezos Bezos, not by a long shot.
“It doesn’t worry us in terms of the overwhelming majority of our businesses, but it is a huge economic trend that 20 years ago was not on anybody’s radar screen. And, lately, it has been on everybody’s radar screen and many, including us in a few areas, have not figured out a way to counter it.”
Coca-Cola. “Removing your own beverage consumption from the equation, please explain why we Berkshire shareholders should be proud to own Coke?” asked one shareholder, tackling concerns (previously raised by hedge fund manager William Ackman) that Berkshire promotes bad health through its roughly 9% stake in Coca-Cola Company.
In a long-winded reply, Buffett, who reportedly consumes 700 calories of Coke a day, said it seemed wrong to blame calories alone for rising obesity levels. “I elect to get my 2,600 or 2,700 calories a day from things that make me feel good when I eat them,” he said. “That’s my sole test.”
He also said he wasn’t convinced that he’d be more likely to make it to 100 if he suddenly switched to water and broccoli, although he did wish he had a twin who only ate broccoli “to see who lives longer”.
It was obvious that Buffett was not going to give in to the suggestion that Coca-Cola is an immoral business or product. The quote from the Coke question that’s getting the most play on social media: “I think if you’re happy every day, I think you’re going to live longer as well.”
Money managers. Buffett again argued that investors would be better off ditching expensive money managers and consultants.
“There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities,” he told the audience, before adding: “Consultants have steered pension funds and others to high-fee managers who, as a group, underperform what you could get ‘sitting on your rear end’ in index funds.
These arrangements “eat up capital like crazy.… (Unfortunately), no consultant in the world is going to tell you, ‘Just buy an S&P index fund and sit for the next 50 years’.”
Derivatives. Buffett thinks derivatives still pose major risks for most of the world’s largest banks.
“It’s still a potential time bomb in the system,” he said of the contracts, adding that a disruption in markets, potentially from a cyber attack, could make it hard for the largest lenders to value their holdings. “Anything where discontinuities can exist can be real poison in markets.”
Buybacks. Asked about Berkshire’s share repurchase plan, which says shares can be bought when the share price gets below 1.2 times book value, Buffett said he had “mixed emotions” about the issue. While buying back stock is the surest way to increase earnings per share — “the math is simple” — he doesn’t like the idea of buying out his partners — shareholders — unless the stock “really seems like a good value”.
Oil. “We haven’t the faintest idea what the long-term price of oil is,” Buffett said.
“We don’t think we can predict commodity prices,” added Munger.
Financial education. “I think if you expect a lot of financial efficiency in American higher education, you’re howling at the wind,” Munger said in response to a question about rising student loan balances.
Regarding educational philanthropy, he said he did a lot more than Buffett in this field, and was “frequently disappointed. The people in their working ages, in a rich society, have an obligation to both the young and the old. If we have problems with our school system it’s not because we’re cheap,” said Buffett.
“I was the trustee of a college that saw the endowment go from $8m to over $1bn, and I didn’t see the tuition go down and I didn’t see the number of students go up.”
Donald and Hillary. Asked if Donald Trump would be a problem for Berkshire, Buffett said while he did think it was “very likely either Hillary Clinton or Donald Trump will be the next president”, he didn’t expect either (having come out to back Clinton) to be a problem.
“We’ve operated under price controls, we’ve had 52% federal taxes applied to our earnings.… But “(in) the end, business in this country has done extraordinarily well for a couple hundred years. It has adapted to society and society has adapted to business.”
The main thing Buffett says he worries about with respect to Berkshire’s future prosperity, is terrorist attacks — cyber, nuclear, biological or chemical. “Being in the insurance business, you know that someday somebody will pull off something on a very, very, very big scale. That’s the one huge disadvantage to innovation.”
Most shareholders’ biggest concern, however, has to do with replacing Buffett. “His investing is not about a magic formula. It’s about him,” one of them told CNBC. “If it was a formula, everyone would be doing it.”
For now though, Mark Hughes, a money manager attending his 25th meeting, sees no sign of Buffett or Munger winding down. “They look as good as they ever did.”
I think if you’re happy every day, I think you’re going to live longer as well