Berkshire Hathaway Annual Meeting: 7 Insights from 2018 and 2017

As we get ready for the 2019 Berkshire Hathaway annual meeting on Saturday, I thought it would be a good idea to review the best insights from Buffett and Munger from the last two meetings. Below is their wisdom that stood out the most.

If you want to learn how to use the insights from the upcoming 2019 annual meeting to make better investing decisions, I am hosting a free webinar, Berkshire Hathaway 2019 Insights, on Monday, May 6th at Noon ET. There are only a few spots remaining, so please be sure to reserve your spot if you want to join other Buffett and Munger aficionados like you for a lively discussion.

1.  “A lot of other people are trying to be brilliant and we are just trying to stay rational. And it’s a big advantage.” – Charlie Munger

I am frequently asked what my competitive advantage as an investor is. One friend even went as far as to tell me (only half-jokingly) that he wished that I had some special satellite that could look into the parking lots of companies to predict demand. I do not have such a satellite, nor do I think it would be particularly useful to the kind of long-term value investing that I do. One’s competitive advantage in investing usually comes from a combination of things, and Charlie reminded us that one of the most important is temperament. Many people can articulate a good investment approach in theory. It is far more difficult to remain rational and execute it under conditions of uncertainty and real-world pressures. Thoseof us who can fully stick to our investment process despite external turbulence possess an important edge over those who cannot.

 2.  “One of Berkshire’s secrets is that when there is nothing to do Warren is very good at doing nothing.” – Charlie Munger

 Investors frequently discount tomorrow’s opportunities. The result is that when there is

nothing to do that meets their investment criteria they frequently opt to invest in the best of what is available – adopting a relative rather than an absolute approach. As I have argued in The Low Cost of Inaction: Don’t Just Do Something, Stand There! adopting a relative approach and forcing yourself to invest can often be a mistake. One of Buffett’s key strengths is being exceptionally disciplined in waiting for investment opportunities that meet both his qualitative criteria and offer a substantial margin of safety by way of a large discount from intrinsic value. Doing otherwise has the potential both to result in mediocre long-term returns and to increase the risk of permanent capital loss.

 3.  “In investing, if you stay away from a bunch of terrible businesses, you are really off to a good start. […] I think you learn a whole lot more about business by actually struggling with a terrible business for a couples of years than by getting into a very good one.” – Warren Buffett

When I started investing professionally 18 years ago, I had little appreciation for business quality. It was all about valuation back then – finding stocks that were trading at low multiples of earnings and free cash flow. After all, wasn’t that what the father of value investing, Benjamin Graham, taught us in his Security Analysis? As I have learned and evolved through hard-earned experience, I have come to appreciate the importance of business quality. The economics of some businesses are just much more predictable over the long-term than those of others.

Early on in my career I found a chemical company that I thought was statistically cheap and a good investment. My analysis was based on estimating the future mid-cycle profitability of the business. Looking back more than a decade later, it turns out that I was off in my forecast… by a factor of 10! Lessons such as this one with tough businesses have made me avoid businesses of below average quality in my investing. Factors such as the presence of a stable and attractive industry structure, a durable competitive advantage, and a management team that is both competent and aligned have become much more prominent in my investment process as a result.

 4.  “We don't foresee things that we don't have a lot of evidence for.” – Warren Buffett / “If we were assessing Coca Cola right after it was invented, we wouldn't have invested.”– Charlie Munger

 Buffett said that what Jeff Bezos accomplished at Amazon is a miracle – and that is precisely why they didn’t invest in the company. When something is extremely unlikely and there is no historical evidence to support the belief that it’s going to succeed, it is very difficult to correctly anticipate the outcome. There are certainly those, such as some early-stage venture capitalists, who are really skilled at this type of approach. For the rest of us having substantial evidence of success to aid us in our analysis of what the future will look like is likely to improve our chances of successfully choosing the right investments.

5.  “If you are going to live a long time, you have to keep learning. You have to keep revising your previous conclusions.”– Charlie Munger

 The hardest, and yet the most important, thing in investing is the balance between conviction and flexibility. Knowing which one is appropriate at any given time is one of the main qualities that best investors possess that sets them apart from the rest. You have to continue to learn and evolve as an investor – something that we have observed Buffett do extremely well over his career. However, there is a difference between evolution from first principles and allowing a particular market environment or situation to disproportionately affect your approach.  

6.  “One of the questions I ask the CEO of every public company that I meet is what would you be doing differently if you owned it all yourself? And the answer, you know, is usually this, that and a couple of other things. If you would ask us, the answer is, we are doing exactly what we would do if we were to own all the stock ourselves.” – Warren Buffett

The importance of management is hard to over-emphasize, yet it is equally hard to quantify. To the degree that a management team deviates from taking actions that maximize long-term intrinsic value per share, it has the potential to lower long-term returns for the company’s shareholders. Many management teams succumb to these pressures, either through not knowing what to do to maximize value, because of mis-alignment of incentives or because of pressure to optimize for shorter-term or more optically pleasing results than those that would maximize long-term value. Nobody is perfect, and small differences between actual and desired behavior are unlikely to materially lower long-term intrinsic value. However, if the difference in behavior from what a competent management would do if they owned the whole business were material, this is a substantial red flag that could warrant passing on investing in the stock.

7.  “I can't give you a formulaic approach to investing because I don't use one. I analyze all of the factors and come up with an intrinsic value. If you want formulas you should go back to grad school so that they can teach you things that don't work.”– Charlie Munger

 Investing is part art and part science. Those just starting out frequently search, often in vain, for a clear-cut and rigid approach. They hope that if only they diligently apply a formula or a precise set of rules that their efforts will be successful. While one should have a rigorous process, analyzing a company’s qualitative attributes or the caliber of its management team can’t be reduced to a formula or a mechanical exercise. Nuanced judgment is required. The same holds true for other parts of the investment process, including deciding which companies to investigate and estimating the future profitability of the business under consideration. The old adage – that good investing is simple, but not easy – definitely holds true.

If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request an Owner’s Manual here.