BRK Annual Meeting 2020

Never bet against America.

Warren Buffett

Berkshire Hathaway’s annual shareholder’s meeting yesterday was surreal. The dreary atmosphere was palpable, with the absence of the more than 40 thousand enthusiastic folks that usually attend – most notably Charlie Munger whose wit and wisdom were sorely missed. No events, no displays, no mascots, no crowds or cameras eagerly following Buffett’s golf cart around. The obvious reason being the extraordinary measures put in place to contain the spread of a global pandemic, which of course also weighed on the dialogue despite Buffett’s standard, though more detailed, attempt at laying out the optimistic case for America. I certainly believe Buffett’s two hour monologue, with only a few words on slides to go by, and subsequent three hour question-and-answer session, while going through only one glass of coke, were remarkable feats in and of themselves. The stamina of the 89 year old is awe-inspiring. I, as well as many others, am glad he and Charlie are in good health, despite their rather innutritious diets. Living a stress-free life may in fact be the secret to longevity, outweighing the nutritional detriment of added sugars. Note taken. 

Despite the unconventional nature of the meeting, the wisdom was still on full display. Some people take Buffett’s words as gospel; some scornfully. I think either extreme is injudicious. But, like the many thousands of “contrarians” that planned to descend on Omaha, every time Buffett speaks I listen, intently. Not because I want to or think I can emulate him, but to learn and admire. It’s astounding to watch the best individual in their field play their game. I played soccer in college and am a huge FC Barcelona fan. As follows, I believe Leo Messi is the greatest player to ever play the game. The moves he performs and stats he puts up game in and game out are uniquely incredible. Almost inhuman. Consistent greatness is a wonder to behold and can be found in every field.

Buffett has done more for the investing community than any other person ever. Of course, he didn’t get to where he is without being hugely influenced by others, but the longevity and publicity of his teachings have been instrumental. He has said he wants his tombstone engraved with, “Teacher” and he undoubtedly deserves it. Speaking of, it’s somewhat depressing that the world celebrates iconic individuals post-mortem. It’s a shame they don’t get to realize and appreciate the considerable impact they’ve had on so many to the fullest extent. Celebrations do happen, and the annual shareholders meetings showcase the appreciation and reverence people have for Buffett and Munger. But less often than they should. I bet the outpouring of love and admiration for Kobe Bryant would’ve surprised even he, though I recognize tragedies are impossible to predict. 

I am not an expert on Buffett or Berkshire. I don’t think Buffett is always right – nobody is – though I do think he’s right a lot of the time as his track record has clearly shown. Although Berkshire’s stock price has notably lagged the S&P in the recent decade, it doesn’t diminish the fact that he’s crushed the markets since inception. It’s difficult to continue to bat over 0.400 or win scoring titles later in your career, but the greatest can still be better than most. This meeting shows he still is. 

The main message was clear: I don’t know what the economic impact of the shutdown will be – nobody does – because the probabilities are incredibly wide and impossible to accurately discount, but don’t bet against America over the long run. I’d say that’s pretty straightforward, reasonable, and backed up by the facts. He added, “You can bet on America, but you’re going to have to be careful on how you bet.” Wise words. As always, he’s subjectively weighing the probabilistic outcomes and positioning Berkshire accordingly. Is the economy experiencing a massively negative and widespread disruption? Obviously. Does the stock market mirror the economy? Nope. Should it? That’s for each investor to answer.

In my opinion, there are a lot of hot takes from the meeting that are clear misconceptions, as nuance is oftentimes overlooked. Although I don’t expect to change anybody’s mind, these are my judgments on just some of those takeaways, and, as always, I reserve the right to be wrong.

Buffett is past his prime. Of course he is. He’s 89. He’s been investing since age 11. I hope it doesn’t take 78 years to get to your prime. But he’s still better than most at the game he’s playing. His ability to be rational, objective, and emotionally stable, and to think independently are as evident as ever. That doesn’t mean everything he says is undeniable truth or actionable advice; investing isn’t easy.

The airline sales show that he’s lost it. No. The airline purchases were a, “probability weighted decision that we were getting an attractive amount for our investment.” Just because the investment outcome is a loss due to an unforeseen, low-probability catastrophic event doesn’t mean the process was flawed. Stop resulting. Though he admitted it was a mistake, I think luck played much more of a role than skill. When the facts changed he changed his mind, which actually shows he’s still got it. And “the world changed for airlines.” Many investors double down on positions that go against them, dismissing the fact that fundamentals have changed. Overconfidence, confirmation, and status quo biases have caused a lot of people lose a lot of money.

Buybacks are not the same as dividends and are immoral. No. If he wasn’t clear in his 2018 shareholder letter, his chuckling reiteration that, “Buybacks are so simple, it’s a way to distribute cash to shareholders” couldn’t be any more concise and factual. Some still refuse to accept it. However he does believe that they can be “stupid,” similar to how issuing a dividend can be stupid. Buybacks are a capital allocation decision and shouldn’t be a financial manipulation tool. He also believes scheduling buybacks is inane; buybacks should only be used when management believes their stock is undervalued. Yet it is never easy for management accept their stock is overvalued (Elon is irrefutably unique). Regardless of emotional or political leanings, buybacks and dividends are equivalent, full stop.

In the prior crisis Buffett bought areas of distress, specifically Goldman Sachs and Bank of America preferreds, and this time he sold areas of distress, specifically the airlines, therefore he believes this crisis is worse than the prior. No, though only Buffett knows what he believes. He did say about the former, “We weren’t buying to make a statement to the world, we bought them because they seemed like intelligent things to do… [to] take advantage of very attractive terms because the market was in a state of panic.” As always, he assesses the risk and reward for the opportunities the market presents. Every business is different, as is every crisis. The risk reward in the banks in 2008/10 is different than the risk reward in the airlines in 2020. He’s not a macro investor, so his trades aren’t an assertion on the state of the economy or crisis. Further, he acknowledged that the Fed stepped in sooner and more aggressively than in the past, which clearly aided market sentiment in the near term, preventing or postponing calls to Omaha. 

Buffett is bearish on the market. Not really. If what is meant by that statement is that he doesn’t view buying certain businesses at these price levels as a good risk reward bet, then sure. The outcomes are wide and the market’s valuation is higher than historically. Should that give investors pause? Possibly. But as he has proclaimed for decades and spent two hours describing, America is resilient and will prosper over the long term. Consequently, businesses will thrive and the stock market will rise accordingly. Nobody can predict the short-term fluctuations.

Buffett is trying to time the market. No. As he learned from Ben Graham and repeated again, the market is there to guide, not instruct. If he sees bargains he will act, and swiftly. If he doesn’t, then he won’t. It’s as simple as that. He and Charlie have no problem sitting on their asses, something anxious investors struggle to do. Timing involves an expectation of what the market will do, and Buffett assess, rather than assumes. He clearly understands he doesn’t know, and nobody does, where the market will go. Maybe Mr. Market will come back after a few drinks, and apparently now a few hits, offering better prices. But he doesn’t presume it will.

Buffett isn’t buying, therefore nobody should be. No. Buffett, just like every investor, has a different risk tolerance, circle of competence, capital allocation strategy, time horizon, and subjective outlook. On top of that, he’s allocating capital within a conglomerate, not running a portfolio purely of risk assets. Besides, Buffett has always been a conservative investor, discounting the range of outcomes towards the pessimistic rather than optimistic side. At this moment, the possible pessimistic future outcomes could be drastically negative. But that doesn’t mean they’ll come to pass, nor will they have an equal impact across all businesses. Some businesses outside of his circle of competence will be less impacted than those within.

Buffett isn’t buying Berkshire’s stock, therefore nobody should be. Possibly. I’m more sympathetic to this argument as he explicitly said “I don’t feel that it’s far more compelling to buy Berkshire’s shares now than 3, 6, or 9 months ago.” So obviously his assessment of the intrinsic value has declined. And who am I to say otherwise! But does that mean nobody should buy any company that isn’t buying back their stock? Clearly not. Additionally, Buffett referenced the “option value of money” in the same thought process. He probably assess that having cash on hand has greatly increased in value. Again, Buffett is conservative and wants to leave Berkshire in the best possible shape for his successors. It seems he believes rather than returning cash to shareholders at these current prices, it could be better used to help internal companies whether the crisis. As the future plays out, his assessment will change and that cash could once again be used to buy out others’ stakes. So you may end up selling to Buffett after all. 

Buffett isn’t being greedy therefore others aren’t fearful. No. For one, fear and greed are impossible to pinpoint. Yes, there are indicators of market sentiment based on both market technicals and surveys that provide an approximate gauge. But those can swing dramatically and quickly. The market sits around 16% below its all time high just a little over two months ago. Is that justified, or does it show widespread fear? In the interim, we witnessed the fastest 34% decline in history, and subsequently a 25% rip off the low. Was the decline justified, or did it show widespread fear? If it was the bottom, the narrative will be, “Everybody panicked, how could Buffett have missed it.” If it wasn’t, “Buffett was right to wait to be greedy until there was blood in the streets.” 

The market will tank on Monday. If you think you know what the market will do, you wasted 5 hours on Saturday, and good luck to ya. 

People can argue until they’re blue in the face about the above debates. Opinions are subjective and emotional, as is investing. That’s what makes a market. What is undeniable, though, is the impact that the greatest investor of all time has had, and continues to have, on the discipline. That should be acknowledged above all, whether you agree with him or not.