The Berkshire Annual Meeting was on Cinco de Mayo. If you were too busy with Margaritas and/or Mint Juleps, you can watch the recording here. Yahoo will also slice and dice it into audio only podcasts here (it is also available through other apps and has 2017 up right now).
I’m sure the meeting will be more ably dissected elsewhere. I did, however, want to quickly make a few observations and stick a pin in a company/industry to look at more closely in the future.
First, I thought it was interesting that Warren and Charlie talked a little about the difference between value and price. In the last few years, it was kind of hard to tell if they had become EMH adherents or what (you could tell they weren’t by their actions…but still). They were praising the index funds pretty enthusiastically.
This time, however, they kind of got into the old details of The Intelligent Investor and how super cheap works, but doesn’t scale (and is hard to find now…I would add, in the U.S.) It was interesting to hear Charlie talk about the evolution of Graham in his later years. This has been discussed elsewhere, but I find Charlie to be more authoritative. He noted that Graham basically couldn’t find the super cheap stuff so he was adapting. Based on other reading including this or this. Graham was leaning more toward indexing maybe with a value tilt.
So basically, while index funds are the best option for most investors, they probably base that conclusion more on the low costs and turnover and potential reduction in bad behavior (performance chasing) than the EMH. Charlie also “laid the wood” a bit to false precision in valuation, investing, and strong-form market price efficiency. Warren, very cleverly, said if a solution is described as “elegant” it’s probably not very effective in the real world.
Charlie gave the example of his analysis of COST back when he got long. It was super simple, like most of these billionaires do it (e.g., Icahn, Peltz). He said that COST was trading at like 13 times earnings and he saw how much better it was operating and how attractive/loyal its members were and he thought that it was worth a whole lot more than that.
Gold and Digital Gold
Warren gave his usual stump speech about fondling gold. He also took down Bitcoin, stating that the value is only derived from “the greater fool” theory and “it will end badly.” He actually got a little cheeky and called it “rat poison squared.” I suppose that means it is spreading and drawing in lots of marks.
I have spent some time studying “crypto assets” and blockchain technology, but have not formed a conclusion. I think I agree with Warren’s conclusion about Bitcoin. Then again, I would never own more than a token position in gold either. If I’m looking for a “store of value” I would prefer pipelines, or timberlands, or shopping centers, or an operating business. I would also note that Warren doesn’t have to get this right. He’s simply passing the game, so it’s probably just an opinion. If he puts money to work on something that probably means a lot more than when he’s trying to be entertaining for 6 hours of questions.
As for the other cryptocurrencies, I can’t figure out why they should end up capturing much of the value of the blockchain technology. I am am stuck on the HTTP analogy, where the value didn’t accrue to the HTTP sort of infrastructure (or even many of the early companies developing applications for that technology). The value accrued to later companies that used the base technology to develop killer apps, like Google, MSFT, AMZN, etc…. It seems like the someone will reap the benefits from some distributed ledger applications, but I think that could just as easily be companies yet to be created or even incumbents.
Elon Musk ‘s Nervous Breakdown
Charlie responded to some sophomoric comments by Elon Musk about moats. Elon basically responded dismissively to a question about moats on his “captain insano” earnings call last week. Elon was joking around about physical moats (like filled with water) and saying the companies with the highest rate of innovation are the ones who win. This sounds like some bubble boy bullsh*t to me.
Innovation is really just another part of enhancing the durable competitive advantage, which is the concept reflected in the “moat” analogy. But innovation alone may not keep capital from pouring in and ruining your business. Elon will probably find that out if and when he makes Tesla profitable and a bunch of imitation EVs come flooding in. Without a brand or network or patents or some other durable competitive advantages (like the charging network, which I think was what prompted the question on Elon’s callus horribilus), the ROICs (assuming they get positive first) will crater.
Then Warren said he didn’t think Elon would want to compete with them in candy. Elon tweeted back about this pretty much all day on the 6th. Seems like he should be spending his time working on getting cars built or begging for money or something rather than tweeting at octogenarian billionaires. We might have to cancel the Telsa tithe…or maybe we can invest it in BYD.
China
Related to that, Charlie said Americans are missing China and are underweight. Personally, I am not as optimistic about how China will turn out as is Charlie. Granted, I’m not close friends with Li Lu (or a billionaire).
Electing President Xi as basically Mao part 2 is not a good development in my opinion. I don’t want to overweight China, where I am a junior partner in everything with the Communist party, and I can only get capital in or out with their restricted blessing (and there are limited/no checks and balances to address party abuses).
I will, however, plan to use ex-us market cap weighted funds for most of my foreign exposure, so I will have China exposure consistent with the foreign market caps. I am overweight ex-us, as I’ve written before several times. Japan and the UK are probably the two highest country exposures (due to value factor tilts).
Wells Fargo
Someone asked about WFC and all of the scandals. Warren and Charlie basically rehashed that bad incentives create bad behavior. They also said in big organizations bad stuff can happen. The key point was they feel like WFC is likely to be on best behavior now after this purge and the embarrassment (i.e., they’re not planning on selling).
That makes some sense, but you know I always thought the old Norwest financial (which acquired Wells) was too aggressive and kind of scuzzy. They didn’t keep their brand, maybe that tells us something. The old First Union, over here on the east coast, was like that. They acquired Wachovia and took the name/brand (and promptly blew it up). Maybe my impression is based on the loan production offices and high rate consumer finance focus they came into the east coast markets with initially. Maybe it was their old CEO being a little too much of an ideologue, espousing his Rand-ian views, for my tastes. Anyways, I am a PASS on WFC unless it gets really bombed out valuation wise.
Kraft Keinz/ 3G
They were asked a couple of questions related to KHC and 3G. I think one was about Warren leaving the KHC board and maybe their view of hostile deals and whether that was related to the Unilever non-offer. Warren basically said they love 3G and he was just getting off boards. He went into the time demands and brain damage required to serve of public company boards, it seemed believable.
I’ve been kind of following KHC since they did the combination with Heinz, but it hasn’t been in the zip code of cheap in my estimation. During the annual meeting Warren noted that they are very capable managers dealing with a little headwind but noted that CPG companies continue their long history of having very high returns on tangible capital. He also said they aren’t growing fast, but that has been the case for a long time.
I did a little work on KHC this weekend. Bernard Hees, KHC’s CEO, recently participated in a pretty good interview with the NY Times. They definitely hit my checklist item about having the views of shareholders protected/represented. 3G manages only their own money. Hees says they are therefore focused only on the long term.
I have heard a respected quant critic of private equity, or at least their purported operating prowess, say that maybe 3G’s cost management discipline is the only really repeatable advantage in private equity. He said some of his quantitative research bore this out, but noted, you can’t invest with them because they only manage their own money. Well, via KHC, I could invest with them. So, that’s interesting. It is also about the biggest endorsement of their own style that they only manage their own money. Kind of like what Greenblatt did when he shut his hedge fund or what Buffett did when he shut down his partnership.
I listened to the most recent KHC conference call this weekend and it sounds like KHC thinks some growth is going to come in the second half, but they thought that was going to happen at least one time before. Interesting that they see some shipping inflation coming through as well (confirming GIS and others claims). I suppose some of that is to be expected with oil prices. Should be interesting to see how that impacts e-commerce over time. Absent drones, that seems like it could be a big roadblock/bottleneck in the future.
They indicated that they have launched some new products outside North America, which are doing well, and they project some growth this year based on bringing those to market in the U.S. I personally wouldn’t build a whole bunch of growth into my expectations.
They observed that the industry has come down quite a bit in valuation over the last year or two. I note with great interesting that there are a lot of smart financial operators working in this space (See, POST-Stiritz and co., NOMD – Franklin and co., KHC – 3G, Buffett, PF – Blackstone, Jana, CAG – Jana, ValueAct, MDLZ – Peltz).
So maybe this is a good spot to fish. KHC is not cheap enough yet for me, as there are some real risks, including the share gains by store brands (the Germans: Lidl and Trader Joes, pretty much feature only their store brands) and disruption in the retail channel, but it might be getting in the zip code of interesting.
Emulating the Berkshire Model
One final thought. They had (another) question about the durability of Berkshire. This is kind of getting morbid and repetitive, because people have been asking about it for like a decade+ now, but they both thought Berkshire would endure for a long time.
One thing that Charlie said is few have tried to copy their organization. Its a little tough to tell exactly what he’s talking about here, but I think largely the decentralization, focus on the long term (including building a good rep), combined with rational capital allocation (outside the operating businesses), with or without the insurance being added (as that allows for another area to allocate capital when the insurance market is firm, or AIG comes to you with a dumb deal).
I think there have been a lot of organizations, even prior to Berkshire, to have employed some of these levers. Indeed, as I have mentioned before on this blog, the Outsiders covers a few. I also think the Mellons, Pritzkers, Tom Evans, Gurdon Wattles, and others could be in that group. Charlie is right thought, there aren’t many contemporaries. Especially if he’s focusing on the combination of private and public market capital allocation. There are a few potential emulators for us to watch, like Markel, JAB, and Boston Omaha (we also need to be skeptical in case of pretenders), but not many.
One thing is for sure, we should watch Warren and Charlie closely for as long as we can, and enjoy every minute of it!