There was no digital confetti, and no free stock for joining either. Nevertheless, the Warren Buffett and Charlie Munger show out in Los Angeles proved to be good theatre — filled with wit and wisdom from two of the world’s most successful investors.
The occasion was the Berkshire Hathaway Inc. annual meeting — a virtual affair this year — and Buffett, 90, and Munger, his 97-year-old longtime business partner, set out to be voices of reason and sanity in an investment landscape looking more surreal by the day ( SPACs, anyone? Maybe with an NFT thrown in?).
Here are some of the takeaways from Saturday’s event that apply to the investing world and beyond.
Mega-cap tech stock valuations are not “crazy.” The reason: Incredibly low rates on short-term government debt, or Treasuries — which are “the risk-free yardstick against which other values are measured,” said Buffett.
“Interest rates basically are to the value of assets what gravity is to matter” — and the rate on short-term Treasuries is really nothing today, the Berkshire Hathaway chairman said.
If Treasury rates are really supposed to be this low, those high-flying tech shares are a bargain, Buffett said (and that is one big “if”). That view contrasts with the prevailing wisdom in the market, which is that tech-stock valuations are extreme.
“The Googles and Apples are incredible in terms of what they earn on capital,” Buffett said. “They don’t require a lot of capital, and they gush out more money.”
Successful stock-picking is actually quite hard. Buffett put up a slide of the 20 stocks from around the world with the largest market capitalizations. Five of the six were U.S. companies — Apple Inc. at the top, at about $2 trillion, with Microsoft Corp., Amazon.com Inc., Google parent Alphabet Inc. and Facebook Inc. holding the No. 3, 4, 5 and 6 slots. (No. 2 was Saudi Aramco.)
Then Buffett asked the audience to think about how many of those companies they would expect to be around in 30 years — maybe five, maybe eight? Then he showed a slide with the same information — but from 30 years ago. None of the stocks from the 2021 slide were on it.
“I would guess that very few of you would have said zero, and I don’t think it will be, but it’s a reminder of what extraordinary things can happen,” he said. “The world can change in very dramatic ways.”
Even if you understand the promise of an industry — like the birth of the automobile — you need to choose the winner in that industry. “There’s a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future,” said Buffett. “I do not think the average person can pick stocks.”
Beware appeals to your gambling instinct: “American corporations have turned out to be a wonderful place for people to put and save their money but they also make terrific gambling chips,” Buffett said.
He suspects that a lot of the short-term options trading in Apple’s stock comes from young traders on Robinhood, the popular trading app that’s drawn millions of rookie investors. Buffett isn’t saying gambling itself is shameful — he called it a “very human instinct” — but he said “I don’t think you’d build a society around doing it.”
As more people enter the casino than leave it, “it creates its own reality for a while and nobody tells you when the clock is going to strike 12 and it all turns to pumpkins and mice,” he said.
Index funds are the answer for most investors. The fact that it’s so hard to predict what kind of tremendous change there will be in the world is a great argument for diversified index funds, Buffett said.
The billionaire has advised the trustee of his will that when he passes, 90% of his bequest to his wife — now in Berkshire stock — should be in a stock index fund like the S&P 500, and 10% in Treasury bills.
Sometimes the best investment is in yourself. Or at least, in what you know best. And no one knows Berkshire’s intrinsic value better than Buffett.
With a cash pile of more than $145 billion at the end of the 2021’s first quarter, Buffett bought back some $6.6 billion in Berkshire shares during the first quarter. The pace of buybacks has been decelerating from prior quarters, however.
Buffett used to describe share buybacks as basically an accounting gimmick, as something done in order to goose a stock price, and often done without enough price discipline. He’s typically wanted to deploy cash in big acquisitions or stock purchases.
But in 2018 he loosened his buyback policy as Berkshire’s cash kept growing. “We can’t buy companies as cheap as we buy our own and we can’t buy stocks as cheap as our own,” Buffett said.
Never say never. Buffett stayed largely away from tech stocks for many years, saying he didn’t understand their business models. Now Apple is a huge holding — Berkshire owns just over 5%.
Even so, Buffett doesn’t describe Apple in tech-y terms. “I feel that I understand Apple and its future with consumers around the world,” he said.
“Apple has fantastic management — Tim Cook was under appreciated for a long time, and he has a product that people absolutely love,” he said. “There’s an installed base of people and they get satisfaction rates of like 99%.”
It’s okay to admit mistakes. There were a lot of mea culpas at the annual meeting. Buffett admitted that it likely was a mistake to sell some Apple stock last year, and that he learned a lot of lessons from a failed healthcare venture with JPMorgan Chase & Co. and Amazon.
Pick your public battles wisely. Buffett has been a Bitcoin skeptic.
When asked for his views on cryptocurrency at the annual meeting, he dodged the question. “We’ve probably got hundreds of thousands of people watching this that own Bitcoin, and we’ve probably got two people that are short,” he said. “So we have a choice of making 400,000 people mad at us and unhappy, or making two people happy, and that’s just a dumb equation.”
Munger, however, let it rip. “I don't welcome currency that is so useful to kidnappers and extortionists,” he said.
Guard your competitive edge. One questioner asked if Buffett’s famed portfolio managers at the company, Todd Combs and Ted Weschler, might have a higher public profile in the future. “They are assets of Berkshire, and there is no reason for them to be out there educating other people on how to compete with us,” he said.
Cultivate optimism. Buffett is a pretty cheery person, often extolling the virtues of capitalism. He recommends a sort of even keel approach to life: “In 62 years, Charlie and I have never gotten into an argument, never got mad at each other,” Buffett said.
Studies have shown that optimists have a better quality of life than pessimists, and people high in optimism have a better quality of life than those less optimistic. The only problem with this observation? Charlie Munger is 97, and his world view can sometimes be bleak. But his views on Berkshire and Buffett? Very optimistic.
--With assistance from Katherine Chiglinsky.
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