Berkshire Hathaway - a week of learning

By Max J. Rudolph, FSA CFA CERA MAAA

Given the number of other writing commitments (nearly 20 papers/essays since the beginning of the pandemic) I have not been regular about writing a newsletter. In fact, the last one I did was May 2021 following the virtual Berkshire meeting. These live get togethers are nearing their end and I will miss them, both for content and for the reminder that my strategies for investing might seem unique but there are others in the same tribe. I am so excited that the Warren and Charlie show was live again this year, and also that we don’t seem to have suffered a super spreader event despite all being fully vaccinated.

The exhibit hall was somewhat reduced this year, although the exhibits were moved around. No major books about value investing were released since the Adam Mead book last year (I had a chance to hear him speak and have him autograph my book. Nice guy–his book is valuable but he’s more of an fanboy than a guru). I added one book to my wish list based on recommendations-Trillion Dollar Triage, by Nick Timiraos, about actions taken at the start of the pandemic. I’ll be interested to hear about the role private equity played in getting fallen angels protected.

As I often do in my newsletters, what I write expands on what others say. The speakers tend to echo my own reasoning but use improved wording and are more polished.

Berkshire Hathaway annual meeting and personal thoughts

These were highlight comments for me – you should watch the entire meeting to see what jumps out to you.

• The movie presented a long commercial from BHE noting their sustainability efforts. I noticed when prepping for the meeting that Berkshire includes info on carbon footprints for both BHE and BNSF. With both the SEC and NAIC requiring TCFD compliance going forward it will be interesting to see how this impacts BRK and where it places subsidiaries.
• The Great Resignation caused a lot of people to quit their jobs and do something new. I wonder if this will translate into a boom for small caps in a few years as some of the firms created as a result become successful.
• The CFA Nebraska dinner on Thursday night featured Abhay Deshpande. I was not familiar with him before this event. He did a nice job. One comment I liked was that a dividend means that you are paid while you wait. (obvious, but a good sound bite)
• One of the BRK shareholder proposals suggested that Berkshire segregate the roles of CEO and Chair (defeated). Generally, this is a good idea. Someone referred to a study that combining CEO/Chair roles leads to outsized performance – both good and bad – for the tail deciles, but made little difference for companies in the middle. The recent proxy proposals remind us that it is a bad idea to ever say always or never. When I vote my proxies, I generally prefer to split the roles, but don’t mind when they are combined if it is the founder who owns a lot of shares. I’m also grading scandal papers this week so can assure you that this is not always the correct choice.
• When I vote proxies, I vote no if the board candidate is aged 67 or greater (once I’m this old it will be interesting to see if I raise the limit), own fewer than $100,000 of shares (I used to say they needed to own more shares than I manage), and they must have no ties to companies that (in my mind) have poor governance. I only have a few that I blackball, based mainly on those who enabled bad actors in the past.
• I heard Tom Gayner speak twice, once at Mario Gabelli’s event Friday morning, and also at the Creighton Value Investors Conference Friday afternoon. I may attend the Markel event next year. His wife and others from Markel sat next to me at the morning event. I noted to them that his comments reminded me that I don’t come to these sessions to necessarily learn a lot that is new. He reminded me of what I already know, giving me confidence to stay the course as the near term future is likely to be challenging.
• Gayner also gave a good analogy/sound bite. You want to maintain low leverage because you want to “finish the hand.” This means you make sure not to get a margin call in the middle of a volatile market when you have a good long-term strategy.
• The proper way to implement ESG (environmental, social, governance) will be a hot topic for at least the next few years. It is important to keep in mind that we want to look forward, not back, so may need to adjust collected data. It reminds me of unknown knowns, where historical data is not predictive.
• Supply chain interruptions in industries like autos mean that inventories are running low. This will have big implications for those using LIFO accounting as recent stability or growth will have hidden the low cost basis of materials on a balance sheet.
• There was a climate change proposal submitted (and defeated). The focus is on disclosure, and they give no credit unless you follow a specific group’s net zero reporting. They specifically are concerned that Berkshire notes their carbon footprint for BHE and BNSF but not for the insurance subsidiaries based on liabilities. While I am for reducing greenhouse gases, and have written several papers to that effect, it seems to me like politicians are throwing insurers under the bus when they should be the ones protecting the public by restricting who a company can insure.
• Because it occurred during the annual meeting at the end of the day it has not received any publicity, but the meeting highlight for me was Mr. Buffett talking about his experience with pension funds when Salomon had a run on the bank in 1991. In Buffett’s opinion, CalPERS nearly triggered a liquidity-based default. They forced WEB to travel to California to take a meeting with them. Once they showed their ability to force a meeting they backed off, but Buffett claims they pushed their concerns to a level that nearly caused the dominos in the financial system to start falling. He also shared an interesting view about who a pension plan represents – in his view, for a state retirement plan, it is the future taxpayers of the state since the plans are underfunded. He also noted that taxpayers could move to another state. The proposal is presented at 5:24 and Buffett responds at 5:30 (hours, not minutes). https://www.cnbc.com/video/2022/05/01/watch-warren-buffett-and-charlie-munger-preside-over-full-berkshire-hathaway-annual-meeting.html
• Adam Mead’s notes from the meeting included a note that Ted Weschler was interviewed on the I am home podcast (Nebraska Furniture Mart). Worth a listen! https://podcasts.apple.com/us/podcast/lunch-with-warren-buffett-working-for-berkshire/id1502613782?i=1000558829816

Market Timing

Market timing is hard if not impossible. I’m not good at it. But we all practice it based on when we choose to buy or sell. Why didn’t we buy yesterday or sell tomorrow? Why did we choose today? What you can be good at is being rational, and being aware that this is not our natural state. Over the long run it will work out fine, but it will work better when markets are stable. This doesn’t mean they always go up, just that stimulus doesn’t cause imbalances and bubbles to artificially grow.

I see similarities with climate change. The earth’s climate has been stable for roughly the last 10,000 years. This is consistent with the era when humans have come to dominate the planet. You could plan based on historical data. That is no longer the case. We are nearing tipping points where higher temperatures will lead quickly to sea level rise and forced migration. Risk interactions and their implications matter.

This is how actuaries can earn high salaries. Work with artificial intelligence programs, but understand their shortcomings and set up deterministic scenarios in case you have identified an unknown known. Otherwise it won't be long until actuaries are replaced, first by outsourced labor and later by machines.

Conclusion

My favorite funny comment came right at the beginning of the meeting. Mr. Buffett confirmed that Mrs. See (on the See’s packages) is not him in drag ??.

Max J. Rudolph is Principal of Rudolph Financial Consulting, LLC. He can be reached at [email protected] .

Warning: The information provided in this newsletter is the opinion of Max Rudolph and is provided for general information only. It should not be considered investment advice. Information from a variety of sources should be reviewed and considered before decisions are made by the individual investor. My opinions may have already changed, so you don’t want to rely on them. Good luck!

?2022 Rudolph Financial Consulting, LLC