Is it too late to write down (type up?) some of my observations from the Berkshire annual meeting? It has only been about a week, but it seems like it has been analyzed to death (probably because of the lack of other usual distractions). Well I have a kid and real job, so I am just now getting to put together a (short) post on some of my observations, including the fact that Buffett pretty much laid out the Berkshire succession plan (for now) in about as much detail as I can recall.
This will be a really quick kind of “stream of consciousness” summary of some thoughts about the Berkshire meeting that I wanted to get down here so I can reference them in the future.
Greg Seemed Able
First, I thought Greg Able was pretty impressive. If you don’t know who he is, he’s the vice chairman for operating businesses at Berkshire Hathaway. He basically oversees the wholly owned (non-insurance) businesses. It was kind of neat that he got to get really initiated as taking questions with no live audience. I thought he handled the questions he was asked at the last meeting well, but this time he got to weigh in on stuff that was farther afield from just Berkshire Energy. He’s not Charlie…but who is?
Buffett the Bear
Second, this was not “the most bearish Buffett has ever been.” He was way more bearish near the end of the internet bubble. Back then he basically gave a whole talk about how overvalued the market was and how the internet bubble basket would get crushed. Go watch some of the old meeting on the CNBC website, like every third question was some bubble boy asking him about tech and why he blew it. I would say in this 2020 meeting he expressed that he is very cautious about the range of probable outcomes from covid-19 [and he is not in denial that we already know 100% for sure that we did not dodge the bullet this time]. Basically, to me he was just saying the outcomes are uncertain but they ain’t likely to be good. I don’t ever remember him being overly aggressive during crisis. Even during the GFC I think AIG had already been bailed out before he really got busy investing in many of the AIG counter-parties, he didn’t just “bet the firm.”
Also, I do agree with Buffett about the FDIC in the depression. I think my view on this was firmed up by reading The Great Depression: A Diary. This book is just a diary from a lawyer in Ohio who was an investor during the depression. I was really impressed by his discussion of the bank failures and how you could buy passbooks, CDs, and mortgaged from failed local banks for pennies on the dollar but no one had the $$$ (because all their money was stuck in the failed bank, the affairs of which would not be sorted for some time). The psychological impact of the local banks failing one by one was pretty palpable (I am planning to re-read this one soon).
You…Confirm me
Third, Able took on the question I looked at in: Is 2019 Berkshire too Big to Succeed? and Is Berkshire too Big to Succeed? I am probably enamored of him because I think he gave the same answer I did (and Buffett sort of endorsed it as well, with his typical understatement). That answer is that Berkshire Energy and BNSF have huge potential growth runways and the returns on capital that is employed in those industries is largely a function of regulatory incentives. Their are huge barrier to entry and the regulators offer returns to people who can get stuff done. Not guaranteed ROEs, but nearly as close as you can get. So then you combine that with other options in public and private markets and the low single digits ROE is the probably floor on returns on capital deployed. Then I think you have to factor in the capital provided/float/leverage from the insurance operation. Now the insurance operation has to continue to produce very low cost capital (below the ~low single digit returns that have been allowed in the regulated industries historically) to really goose the BRK holding company level ROE, but it seems like teens are highly plausible (probable in my opinion, assuming some reversion in overall rates, which should influence nominal regulatory returns eventually).
Able talked about combining these three big engines of Berkshire and then layering on some opportunistic other stuff in market dislocations. I think we’re on the same page here and that gives me some confidence I am seeing the ball (of course, my strong bias would be to seek out the confirmation of my prior opinion…but I really do think were looking at the same thing).
Wells and Fargo
Fourth, Buffett still likes (doesn’t hate) Wells. This actually came from the Yahoo interview he did in March that was released in full the day before the annual report (do better yahoo…it was almost stale).
He’s not overly enthused about buying 10x levered financials going into what could be “the Greatest Depression” (my phrase), but he reverted to the old talking points about the dominance of Wells (citing penetration into 1/3 of all U.S. households) and the fact that, after all, the shareholders are the ones who generally got screwed by the fake accounts.
The big error he cited (again) is in not cleaning it up fast enough; but the prior guys were maybe too cocky [after rolling through the GFC like it was basically nothing]. I never loved the NorWest financial lineage of the prior senior mgmt. By the way, I think they cruised through largely because they didn’t have a yuge investment bank making all these horrible proprietary trades (and tons of investment bankers trying to get rich taking all the upside and blowing up the bank shareholders with the downside). They also don’t have tons of credit card loans (relative to C, BAC, and JPM). They are over indexed in first lien mortgages. Their deposit base and market coverage is second to none. Give me their business mix over any other big u.s. bank (maybe BAC, if you jettisoned ML….but WFC has a lot more costs they can cut to show earnings growth after this crisis/the regulators get chilled out).
Not to mention, they’ve been hamstrung with an asset cap going into this mess. Normally that would be a negative but I think it likely forced them to high-grade loans they made and focus more than they would have otherwise on which loans that they actually held on their balance sheet heading into this pandemic.
The biggest risk of Wells having a much tougher time than peers in this crisis to me is that the culture problems with the fake accounts somehow infected their credit underwriting. Scharf has seemed to indicate they didn’t have separate reporting structure for risk management but I don’t know if that induced credit/underwriting or just like legal/ethical risk management. I can definitely see a problem in having the credit officers reporting to the loan officers/sales guys even if it goes up a few levels before they get to override. Now if things get bad enough with the economy all the banks could get dicey, so it’s not like we’re talking Amazon here, but WFC is like 40% cheaper than BAC right now!
Berkshire to the Future
Fifth, Buffett pretty much gave us detailed succession plans for BRK. Maybe I missed it, but I don’t think he’s given this much detail previously about the roles everyone will fill if he and Charlie had to leave tomorrow. Now, he’s 89, but Irving Kahn (another Graham disciple) kept investing until like 108. I think Walter Schloss also went pretty well over 100, so Buffett might be able to go a decade or two yet. Having Greg Able up there answering questions, we can see that Greg is basically overseeing the operating businesses, so maybe Buffett’s actual daily operations aren’t that different from Kahn or Schloss.
Anyway, Buffett said that Able, Ted Combs, and Todd Weschler will be in charge of allocating capital. It makes sense that Able will be primarily in charge of allocating the capital to wholly owned businesses [and/or within the wholly owned businesses]. Buffett has said for a long time that this is the first preference for where to allocate capital. Which is maybe why he was answering questions. Interestingly, Buffett said Ajit would run the insurance operations. So we have Able running the operating businesses, and Ted and Todd helping him manage capital. Todd is currently working as GEICO CEO, so he will have a good handle on that business as well. Able is currently in charge of tons more capital than the other two, but they might take over Buffett’s stock portfolio if he stepped aside.
Buffett has said before there will be an independent chair to “protect the overall Berkshire culture” as things stand right now, when he first leaves. My guess is that will probably be Howard Buffett (maybe I’ve read that). Also, Bill Gates is going to be out there with the dominant voting control of the company, via his foundation, so he’s a pretty good guy to bet with (though he’s kind of busy at the moment trying to help the ungrateful human race). Gates could always step in or appoint a chair to act for him if things got problematic after Howie left [or if he wasn’t up to the task].
I thought some of that was new or at least more detailed than was previously disclosed. I feel good about most of that. Not 100% comfortable with Howie; but if he’s just there in case someone needs to be removed or something and we’ve got Gates who will have the real ultimate rudder, with Abel, T&T and Ajit running most things that should be good. As I said above it seems like Abel gets the potential in the structure that I see, so I am enthused about that for the long-term.
Anyway, those are some quick Berkshire annual meeting thoughts. If I missed any huge takeaways, let me know in the comments. Until next time, I hope you are weathering this economic and health storm as well as possible. Thanks for reading!