Take-aways: Berkshire 2022 meeting

Starting with the Berkshire Hathaway meeting on 30 April22.? Omaha was cold, rainy, and stormy for the weekend.

The Shopping Expo was busy, but not crowded.? They set a buying record.? I bought a $10 Berkshire shirt and got a quote for some additional insurance.? Warren mentioned that a bunch of folks bought Jimmy Buffett boats by Forest River (the boats were about $200K, with a 10% discount, and a long leadtime).? The expo is full of companies that Berkshire owns (Oriental Trading, Pampered Chef, Brooks shoes, Fruit of the Loom, GEICO, Clayton Homes, See’s Candies, BNSF, NetJets, Duracell, and many others).? Lots of junk for sale, including trinkets available only at the event.??

The Bookworm onsite bookstore, not owned by Berkshire, sold books about and recommended by Warren or Charlie.? Interestingly, I got to the Omaha airport early on the way home and the airport bookstore (not affiliated with Berkshire or Bookworm) had several author signings of investing books that the store thought might interest Berkshire attendees.? A good investment book is rare and worth its weight in gold.? Remember my saying that for 99.99% of folks 99.99% of their investments should be in low-cost index funds, invested as fast as affordable.? Yes, that contradicts investing in Berkshire or Markel, another diversified insurance-based holding company.? If you invested in the three, you would be well-off.

So, Berkshire is a diversified insurance-based holding company run by two nonagenarians.? Age was a theme in this meeting and has been the open secret for quite some time with respect to Berkshire.? Everyone knows that Warren Buffett and Charlie Munger will leave the world soon and that concerns folks for a number of reasons.? It is important to note that it does not concern either of them, minus the actual event.? Both plan to live forever, and as both say, “so far, so good.”

How does Berkshire make its money?? It does it several ways, and several of those ways are similar to ways other companies try to do it, but there are several significant differences that make Berkshire unique, truly.

Here is a high-level look at how Berkshire operates.? It’s not really possible to divide the company cleanly into segments, but humans love categories and one can divide Berkshire into three main parts: Investing, operating, and insurance.? There is overlap between those three segments.

Berkshire invests in other companies.? It does this several ways, but in general this is similar to what you would do if you were to open a broker account and tell the broker to buy X shares of Y company for Z dollars.? Berkshire has an advantage that it can do transactions directly with companies in some circumstances.? It also has several disadvantages:? It needs to buy significant amounts of stock in relatively short times; that is physically hard to do, it can change the price in the market, and it can attract spectators trying to be mini-Buffetts.? Warren talked about the difficulties in acquiring Occidental Petroleum (OXY) due to the number of shares tied up in institutional ownership.? After a spending spree in early 2022, (breaking a relatively silent run) Berkshire still has over $100 billion ready to invest in stock or companies.

Berkshire operates companies; or rather buys and allows companies to operate under the corporate umbrella.? They typically do not provide management, but rather rely on the existing management, often the owners who sold the business to Berkshire.? In 2022, Warren bought Alleghany, a diversified holding company, “anchored by a core position in property and casualty reinsurance and insurance.*”? There has not been a recent significant acquisition, until Alleghany.

*https://www.alleghany.com/investor-relations/press-releases/press-release-details/2022/Berkshire-Hathaway-to-Acquire-Alleghany-Corporation-for-848.02-Per-Share-in-11.6-Billion-Transaction/default.aspx

[LinkedIn kills footnote apparently. I'll have to think on how to do something similar.]

That brings us to insurance.? Insurance is an odd business.? It’s basically two businesses: the first is a math exercise and the second is more traditional investing.? In the first, one needs to calculate the probability of a class of folks having an accident or incident or event that requires the insurance company to pay the person or someone else the amount of money agreed upon.? The insured pays a premium upfront and the insurance company pays out the coverage at some time in the future if/when there is a claim.? The goal of the math exercise is to calculate the probabilities correctly and write policies that as a group take in as premium about the same as the company expects to pay back as payout.? Of course, the actual amount to be payout and the timing of payouts are not known for some time, often years or decades later.? If you do the math right, sell the insurance at the right price, and the world turns out to be as you predicted, you end up about even with the premium/payout ratio.? That’s the goal; now the money you took in as premium, but have not yet had to pay out due to claims is the float.? It’s time to invest that money into companies, either as stocks and bonds or by buying them (or some hybrid).? And when it’s time to pay out claims, you better have not lost any of that money and your goal is to have made money on the float.? For most companies, money costs something–you have to borrow money by heading to a bank, issuing some stock or bonds or some other method of convincing some organization to give you money with the promise of giving it back with interest or some other way of paying for the time and risk that the other organization takes on yours.? Berkshire is special in that the cost of its float, as Warren has reported, has been zero or negative.? So, basically people are giving Warren money to do his magic and then only asking for part of that money back after time.? Amazing, is a low-cost or negative-cost float, if you can get it.? And Berkshire has.

Berkshire also has the advantages and disadvantages of size.? If you need access to $100B, Berkshire is pretty much the only place you can go that has the cash and could afford to lose that amount.? It would not be pretty, but it would not be fatal.? For almost everyone else, it would be even less pretty and certainly fatal.

Berkshire has the advantage of honesty.? Warren will provide you with a real offer for your company, if it is big enough and strong enough, and a guarantee that the transaction will go through and you will be paid (pending regulatory approval).? This extends to the operating companies and the investing part of Berkshire.? Warren realizes that the companies within Berkshire will have people that do wrong, but that the culture is set up to not require/encourage folks to fudge numbers or do anything “wrong,” and as soon as they know that there is a problem, Berkshire takes care of it.? That is huge and unfortunately extremely rare.? The dishonesty within Berkshire is extremely rare due to the lack of pressure of incentives to report “favorable” numbers over real numbers.? We have enough money to survive long periods of bad results based upon good decisions, but no company has enough money to survive very long hiding reality.

Both Warren and Charlie were honest and blunt in their commentary and responses to the shareholder questions.? It is worth watching the videos** (the meeting was streamed live) and a transcription would be wonderful.

**https://buffett.cnbc.com/2022-berkshire-hathaway-annual-meeting/

The meeting starts with commercials as folks file in and fill the seats.? Attendance was down after a few years of virtual meetings, due to COVID.? Warren and Charlie noted that shareholders deserve to see the managers (and significant shareholders themselves), especially if they are old.? An old clip of Warren as the new pinch-hit CEO/Chairman of Salomon Brothers testifying before Congress played.? He looked so young and innocent.

The company movie was Berkshire groundhog day with Warren, Jimmy, and Bill Murray.? There was a terrible take on Uptown Funk by Mark Runson and Bruno Mars that nicely showed the long list of Berkshire managers in attendance, but not speaking (only Warren, Charlie, Greg Abel, and Ajit Jain spoke and Greg/Ajit only briefly).

Then the four managers came out to much applause.? Warren presented with Charlie adding comments and brittle crunches.? Then, they took questions live in person and through a moderator for those not in attendance.? Several questions were similar to questions in the past (and the answers were too).? One question was not asked, so Warren asked it with a story about the proposed acquisition of Alleghany and how/why he backed out the financial advisory fee that Alleghany paid from the price that Berkshire paid and then some stories of yesteryear where Warren and Charlie did some interesting non-accounting that was required.

My take-aways that I had captured in real time:

*Have no interest in anyone’s predictions, including your own.??

WEB/CM know that no one knows what the future brings, but that the future will be brighter.

*Worth less is not the same as worthless.

Dips allow one to buy more for less.? That’s opportunity, if the investment is solid.

*Be prepared for fortune/luck.

WEB has repeatedly said that he won the ovarian lottery by being born when and where he was (1930, Omaha, NE, USA).? So, he understands the role of luck, but one can also be ready to take advantage of luck.

*Process must be secondary to culture.

WEB has said over the years that the process of Berkshire is important, but not as important as the culture.? He emphasized that no one in the organization is pressured to provide perfect numbers, but to do things with integrity.? That is critical to success.

*Have the sense to fold shitty hands.

WEB said that he had made terrible investments and had held onto them for too long.? He wishes he had taken his own advice earlier.

*There is no finish line for Berkshire.

WEB notes that many shareholders buy the stock and never sell and that he has no plans to sell his shares (although he has pledged to give away them to charity).? Now, of course people buy and sell shares of Berkshire, otherwise there would not be a market for them and new folks would not be buying into Berkshire.? I did notice that the market for the Class A shares, about $500k each, is classified as illiquid and the bid/offer spread is large.

*Be better in your second half.

WEB/CM both noted that they were better people in their second half and that everyone ought to ascribe to this low, but important goal.

*Someday the sun will burn out too.

Someone had asked about insuring against nuclear attack.? Generally insurance policies exclude acts of war and damage from nuclear weapons; Ajit? Said that some fire policies may have to pay for fires caused by nuclear explosions.? WEB noted that nuclear war would pose much more broad and deep problems to Berkshire than the insurance coverage.

*It’s better to be sane than smart.

WEB/CM noted that they try to be sane first and smart second, as sanity is more important to Berkshire.? They did mention a story or fable about a Berkshire subsidiary that was successfully managed by someone with Alzheimer's disease.? That was an awkward moment, as they said that they like businesses like that.

*Vegas: It where you travel thousands of miles to do something mathematically dumb.

WEB talked about his honeymoon in 1952 to Vegas and how it was amazing how people approach gambling.? They also noted that gambling has made the establishments rather rich.? This is akin to the stock market and certain establishments.

*5 or 6 stray bullets

To some in the gambling/mob world these are real dangers.

*Buy Berkshire and watch your broker starve to death; it’s good entertainment.

WEB/CM noted that a buy and hold strategy for Berkshire shareholders and managers is not very nice to brokers, who make money on trades.

*Berkshire is stronger than any bank.

WEB said that Berkshire has more cash available to deploy instantly than any bank.? (It is interesting to note that Berkshire has invested in a number of banks in the past and currently.)

*Cash is oxygen.

Cash is the way that Berkshire prefers to pay for things and the current cash reserves (over $100B) are available to be deployed.? Berkshire typically does not approach banks or anyone in the financial world for the means to operate or acquire.? WEB has noted numerous times in recent times that the cash-on-hand is too much and that he is looking without success for places to use the cash.? (He found about $40B of stuff to buy in 2022 after the annual report and his annual letter were put to bed.)

I am sure to review the tapes in my mind and on the inet, but the above are great nuggets to consider.