Robert Swift, of the TAMIM Global Equity High Conviction IMA, was recently invited to attend the ever-popular Berkshire Hathaway AGM. He has taken the time to write some notes on what he found interesting and what he observed.
Berkshire Hathaway AGM - notes from the ground - May 2017 - Robert Swift
It’s one of the most sought after AGMs to attend globally and it typically happens in May in Omaha, Nebraska. It is, of course, the Berkshire Hathaway AGM hosted by Warren Buffet and Charlie Munger. It is an investment and media frenzy with unbridled adulation for the duo even from wealthy investment industry veterans. To give you some idea of the frenzy, the presentation kicks off at 9am; the doors to the auditorium open at 7am, and the queue for good seats started up at 5am outside! I went with a friend who is a (happy) shareholder and he was kind enough to drop me off at 5.45am to save his place in the line. In years gone by he had his place saved by younger analysts who would sleep out overnight to ensure he got in right at the front. I was a severe disappointment to him with my lack of commitment!
I attended this year for the first time. I am glad I went and I found the whole exercise fascinating from an investment and sociological perspective.
It was actually great fun, and informative, to chat to folks queuing patiently early in the morning. There were people from all over the world, and people with plenty to say about the state of capital markets, and provide their opinions on politicians and central banks. I also spent the previous afternoon strolling around the exhibition hall in which Berkshire showcase, and sell, as many of their products as they can. They have turned the company AGM into another profit centre. Smart to get investors to pay for your own AGM!
Rather than analyse Berkshire Hathaway which plenty of folks do, (it is one of the largest USA companies by market capitalisation) I thought it might be more interesting to make observations from the Friday and Saturday: the shopping in the exhibition hall, and the queuing, and then the Q&A at the AGM with Warren Buffet and Charlie Munger answering a very wide range of questions and dealing with some protests too.
Americans really don’t mind wealth creation. It’s clearly felt that Warren and Charlie are worth every cent they have made. There is no begrudging their fabulous wealth (Warren Buffet’s 17% stake is worth about USD$70bn) and there is no jealousy or outrage about this net worth. The only outrage came from a German activist investor in the Q&A. At least from what I saw. This attitude to successful wealth creation and the ‘equal opportunity’ is perhaps uniquely American. The obverse attitude to wealth is creeping in in some countries and that is felt to be a bad thing – at least by those queuing and they weren’t all Americans.
The consumer likes theater and company and will spend money. Plenty of people were spending plenty of money on Friday and were seemingly buying stuff which was readily available on line or in department stores. It is no secret that the retail scene in the USA is depressed but it may be that the retailers are just doing it wrong? The trick appears to be to get crowds in and to have entertainment. It is all about getting footfall traffic because the impulse to buy, once inside, is enormous. USA retailers have waited for shoppers who then receive unsmiling service. The products haven’t been pitched and it isn’t a theatrical or memorable event but merely a transaction. Cheap ice creams and a chance to sit in a NetJets cabin; helpful and plentiful service, and some unique items for sale at this event only, all made for plenty of spending and happy people. Retailers everywhere take note. Make your spaces fun places.
There is a serious issue with the perceived ethics and integrity within the USA political and business system. By comparison, Warren Buffet, who has pledged to give away his fortune on his death, is a shining light. His statements on executive pay (too high) and incentives (too easy) went down well. He nicely illustrated the bias in current share option schemes where the strike price remains static such that the executives with such a scheme in place, can take more of the business from its owners (the shareholders) merely by doing their jobs.
Invest for the long term and let the power of compounding do its magic. Berkshire was a leading New England-based textile company. Buffett took control of Berkshire on May 10, 1965. At that time, the company had a market value of about $18 million and shareholder's equity of about $22 million. It was a steal relative to net worth at the time but its market capitalisation is now over USD$400bn. We all try to ignore the short term but it’s hard because what we buy is typically marked to market on a daily basis. Berkshire owns outright much of what it buys and its valuation schedules allow it to look through any short term volatility.
Clearly you can’t double every year but even 8% pa with minimal volatility makes for a large number over a lifetime of investing. Be long term greedy.
Berkshire Hathaway is actually a hybrid Private Equity listed USA equity value biased business. To compare its NAV progression against the S&P 500 is incorrect and to challenge Berkshire to a performance contest with an equity fund is a mismatch. It would be better to compare its NAV progression against a pool of private equity fund returns and the S&P500. Given that Berkshire has no need to exit its investments, nor to deploy its capital raised quickly into deals it has a competitive advantage against PE funds too. While it is unique it is surprising that a hybrid like this isn’t in evidence elsewhere? Maybe Softbank in Japan is the nearest thing?
The benefits of flexibility offered by free cash flow are enormous. Too much debt is a serious problem. Markets panic routinely and the ability to deploy capital from free cash flow or having liquid assets gives you the chance to strike. Fortunes are made at the bottom not at the top. Berkshire invested about $50bn in 2008. The value of the insurance companies, owned by Berkshire, in providing this cash flow are increasingly apparent. Maybe Softbank isn’t quite there yet in not having this free cash flow?
PE funds are currently bidding up the value of private businesses making it hard to deploy capital in this area. Valuations are rich and sacrificing liquidity in the pursuit of an extra 2-3% return or for tax minimisation is currently dangerous. Valuations are also rich in government bonds and you shouldn’t be lending the government money at these interest rates either!
We hope this article is different and interesting. We are not going to try and copy Berkshire’s investing structure but interestingly have some listed companies in common.
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