Berkshire Hathaway’s annual meeting
Exploring the unrivalled track record of Berkshire Hathaway
I’ve had the privilege of travelling to Omaha for 15 consecutive years to attend the Berkshire Hathaway shareholder meeting. During this time, the attendance grew from 9 000 to 2014’s estimated 40 000 investors. Why do more and more investors go? And why do so many of them, including me, keep going back?
When Warren Buffett first invested in Berkshire Hathaway, the company was a failing textile mill. When he realised the severity of the structural problems that the textile industry faced, his investment was already too big for him to get out, so he did the opposite. He ended his current investment partnership and devoted his time to transforming Berkshire Hathaway into one of the most successful investment companies ever. The table below shows the unrivalled track record of the partnership of Buffett and Charlie Munger.
The crux of their investment success is about clarity of thought and simplicity
During the approximately five hours of Q&A at the meeting, you gain many insights about the status of the US and world economy, Berkshire Hathaway’s activities, and views on the markets. Even those who are not interested in markets enjoy the day and learn from Buffet’s and Munger’s wit and wisdom.
But what makes Buffett and Munger so successful? It goes without saying that it is impossible to be a successful investor over the longer term without a strong ethical basis and significant patience. However, when I look back at Berkshire Hathaway’s history, the crowds are drawn by Buffet’s and Munger’s ability to simplify complicated issues and communicate their views in an interesting and clear way. Simplification without understanding is not only meaningless, it is dangerous, because behind every simple answer lies an immense amount of real understanding.
Related to this, Buffett and Munger are always honest and humble about their level of understanding. Responding to a question, Buffett replied in his typical fashion: “That was a big mistake that highlighted our ignorance”. Munger immediately added: “Over the years we’ve dismantled many layers of ignorance, and we’re very likely to dismantle quite a few more in the years to come.” And, “good judgement comes from experience and experience comes from bad judgement”.
Practical guidance on making investment decisions
“$1 invested today can grow to $100. But you’ve got to be consistent and ignore the flashy lights and sirens of the markets. Measure your success by how well the companies you are invested in have done. The market will take the share prices up and down according to the different winds that blow at different times.
The winds will make some look good and some look bad and then reverse the order. But those who consistently stick to their formula prevail in the long run.” These are Buffett’s words at the 2013 meeting. Most investors feel pain. They would have to be psychopathic not to. When the share prices of companies that you have invested in fall, it hurts. The Berkshire Hathaway weekend reminds you to fight human nature’s inherently emotional instincts during any investment crisis.
Moving on from deep value investing
The most important change in Berkshire Hathaway over the past 60 years possibly was that Munger convinced Buffett to evolve from the Ben Graham school of deep value investing. As Buffett explains: “More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and, in a few cases, more than well.”
The other significant change was changing from an investor to a business manager. Managing people requires a completely different skill set than managing investments. Yet, Buffett was able to make the change successfully to the extent where 70% of Berkshire Hathaway’s value lies in non-listed companies in which Berkshire is the controlling owner.
Strong themes at the 2014 meeting
For the past few years, Buffett has been stating that he is “hunting elephants” (seeking out big acquisitions). An investor ballot shows that the overwhelming majority of investors do not want Berkshire to pay dividends (ratio of 45:1). Despite this, Buffett made a statement this year that said that at some stage the cash flow generated by Berkshire Hathaway would have grown to such an extent that they would have to start paying dividends.
When it comes to buying back shares, the Berkshire Hathaway philosophy is only if they trade at a discount to intrinsic value – “else we’re not doing investors a favour”, says Buffett. This is a theme that featured strongly: every decision is made based on whether it is in the best long-term interest of shareholders. This stance on buybacks could be seen as going against corporate America, where management uses buybacks to prevent dilution, irrespective of the price.
Respect and trust
Buffett and Munger’s trust and respect in one another has played a key role in Berkshire Hathaway’s success. It is clear that they seek each other’s counsel before making important decisions – there is no rivalry. It is especially interesting how Munger – who is 90 years old and 7 years older than Buffett – is content with taking the backseat and allowing Buffett to be in the limelight, despite Munger’s own strong personality and high intelligence.
What happens when Munger or Buffett dies?
This year was the first time the question of a successor to Munger was raised and it seemed to touch a raw nerve, one that Buffett does not want to think about. When it comes to his own death, Buffett always gives a standard answer: “I can assure you that the event of my death will be worse for me than for you”. He has gradually been putting things in place – he has placed his large shareholding with the Bill and Melinda Gates Foundation and other foundations. His son Howard will take over as chairman to ensure that the culture of Berkshire Hathaway remains the same, and he has hired two youngsters to gradually take over the investment decisions. However, it seems like Buffett is leaving the question of Munger’s successor to the person who will take over from him.
It is important to remember that the businesses that Buffett and Munger own are all managed by highly competent managements. The fact that they “encourage by example, not by edict” has played an important role in ensuring that the DNA and culture will be carried forward for many years.
The opportunity to review and refocus on your own investment decisions
Personally, I keep going back to Berkshire Hathaway meetings because it prompts me to review my actions over the past 12 months in the relaxed atmosphere of other like-minded investors. I hope that Buffett and Munger remain healthy for a number of years, as the “windscreen cleaning exercise” of attending these meetings has become an important part of my own annual review and I hope to be able to do so for many years to come.
Kokkie Kooyman - Investment manager of the Nedgroup Investments Financial Fund