Buffett’s Woodstock of Capitalism

On Saturday I “attended” the Berkshire Hathaway annual shareholder meeting, dubbed by some the Woodstock of Capitalism. I’ve been to the live show once before, and it’s a neat event for people who do what I do or are otherwise interested in investing. Warren Buffett and Charlie Munger have a huge well-deserved following based on their investment acumen and intellectual contributions made over the years through their appearances, writings, and this event.

This year’s meeting was obviously different. Instead of a packed 40,000 seat venue, there were a handful of people in the building, and most importantly, they did not include Munger who stayed away for precautionary reasons. While I’m glad he’s being smart about his health, his contributions and witticisms were sorely missed.

A key feature of these meetings is the Q&A after the mundane shareholder business wraps up. This year’s questions weren’t as well chosen as in prior years, but Buffett was on stage for almost five hours and shared some takeaways:

  • Holding cash: Berkshire has lots of cash on its balance sheet. Its shareholders inquired about the plans for that cash given the potential investment opportunities created by the bear market. Berkshire did not buy much in the first quarter because Buffett does not think the cash pile is immense given the risks to Berkshire’s insurance business. He explained that you always have to have some cash on hand because you want to be prepared for anything and not dependent on the kindness of strangers or friends. This is good advice for all of us. Have enough cash on hand to handle emergency expenses, and while you should not overdo it given that your cash’s purchasing power will erode over time due to inflation, it’s good to take a hard look at what could go wrong with your finances and set aside the right cushion.

  • Stocks: Stocks will outperform cash and bonds over the next thirty years, according to Buffett, and you should buy them if you can hold them for a long time. He also said you have to expect a 50% decline along the way. This is one of the key points I make in my book Beyond the Basics, and connects to the cash point above. Money should be invested according to its time horizon. Money you need, or may need, in the short-term should be held in cash or short-term bonds. Money you do not need to touch for ten years or more should be invested for aggressive long-term growth in stocks.

  • Airline stocks: Berkshire sold its shares in the four major U.S. airlines recently. Buffett has historically avoided airline stocks, once having famously quipped that airline owners would have been better off if someone had shot Orville Wright’s plane down. He ended up buying the stocks a few years ago and then dumped them this year because he thinks the future is much less clear for them. He is worried that they’ll have too much capacity going forward and that the world changed for them this year. “I don’t know that 3-4 years from now people will fly as many passenger miles as they did last year…you’ve got too many planes.”

  • Fed: In the Great Financial Crisis, Berkshire had the opportunity to provide capital to struggling businesses and extract a nice return. In this recession so far, they have not done the same thing. When asked why, Buffett praised the swift actions of the Fed, saying they did the right things very promptly and companies had the chance to finance themselves quickly because of it. There was therefore less of an opportunity for Berkshire to attractively inject capital into those businesses. The stock and debt markets were in a panic for only a short period of time.

  • Debt: Berkshire raised capital in the first quarter. Buffett has historically issued stern warnings against using debt because it can magnify your losses and wipe you out. He has not always heeded his own advice, and this announcement provides another example. He said it’s a very good time to borrow money given where rates are. Debt, if used within reasonable limits and not for consumption, can be a powerful tool for growing your wealth, and this is not the first time in his investing career that Buffett has shown he agrees with this.

  • He’s Human Part 1: Over the last year, Berkshire has sharply underperformed the S&P 500 and in the last decade has not kept pace with the index it has historically trounced. Becky Quick, who was asking Buffett questions during the event, indicated that she received many questions about the underperformance and some not that polite. If you invest for the long-term, you should assess the merits of your investments over the long run. We all struggle with this notion of what long-term really is. It’s not a few years, or even a decade. Berkshire’s shares have nearly doubled the return of the S&P 500 since 1976. Over the last ten years they have underperformed the S&P 500.

  • He’s Human Part 2: Buffett shared that it’s been seven weeks since he’s had a haircut or put on a tie and said it’s basically been a question of which sweatsuit I wear. I don’t have sweatsuits and I shave my head, but I feel you Warren.

For more about Buffett, you can check out Wednesday Reading List – Warren Buffett Edition.