MIGRATION TO OMAHA - A trip I never imagined I would take

Ten years ago, if you had told me that I would travel half way across the country to spend an entire Saturday in a 20,000 seat basketball arena listening to two ninety year old men speak to a capacity crowd, I would have said you were out of your mind Yet, this is exactly how I spent this past weekend and it was worth it in every way imaginable. In a world dominated by the 24 hour news cycle, the internet, and mobile devices, listening to Warren Buffet and Charlie Munger at the annual Berkshire Hathaway conference felt like a mass therapy session for anyone who has ever sold when they should have bought, bought when they should have sold, or made any of the other countless mistakes that have plagued investors for generations...and that was just the tip of the iceberg. There were plenty of life lessons, historical context, and reminders of what is important in life as well. 

After writing endless pages of notes, I pulled out the pieces that resonated the most. Hope you enjoy. 

KEY TAKEAWAYS

1. A Sight to Behold: In order to get a decent seat at the Century Link Arena in Omaha, we left the hotel at 6:15am (the event did not start until 8:30am). When we arrived, lines appeared to number in the thousands (people actually camped out for the best seats in what appeared to be a Krzyzewskiville-like village). From men in three piece suits, to people dressed in hunting gear, to countless others with foreign accents, to families with young children (I saw a few infants), the contrast was stark. People came from near and far to hear these two men opine on the markets and life. If you ever have the chance to do the same, it is worth making the trip. 
2. "Berkyville": The Omaha convention center was transformed into "Berkyville" for the weekend and filled with booths representing many of the companies that Berkshire invests in (Dairy Queen, GEICO, See's Candy, Fruit of the Loom, Clayton Homes, Borsheim's Jewelry just to name a few). The floor appeared to be close to three football fields long and was filled with Berkshire cult members, excuse me...shareholders. It was hard to walk away without concluding that a large part of Berkshire's success has been driven by simply buying America - public and private, consumer and industrial, old and new. 
3. We are Going to Miss These Guys One Day - Buffett and Munger are special. I have never met either of them, but it is obvious that they represent what all investors should emulate to be. Simply stated, they have shown that you can do it the "right way" and still be incredibly successful in the process. While they are both still very sharp and healthy today, even the Oracle and Charlie cannot escape father time. They are 86 and 93 respectively and will not be around forever. We should cherish whatever time we have left with them. 

INVESTOR BEHAVIOR

1. Habit Forming - Buffett and Munger say the same thing each and every year while drinking their Coca Cola and eating their peanut brittle on stage. Despite this carbon copy presentation, people still fly in from all over the world to hear them answer questions for close to six hours. This clearly seems irrational on the surface, but not so when you pull back the curtain. Their process and philosophy have created durable habits grounded in patience and discipline. This alone is worth the annual reminder each May.
2. Learning from Mistakes - Both Buffett and Munger harp on their mistakes much more than their successes. From investing in Dexter Shoes, Salomon Brothers, textile companies and IBM to missing out on Google and Amazon, their missteps are always top of mind. For Munger it is all part of a pattern he refers to as "continual learning". Buffett takes it step further saying that everyone should start their careers running a very poor business in a difficult industry. He argues that you will learn infinitely more by doing so because there are no "industry tailwinds" to mask your mistakes and the success of the company will be directly attributable to your decisions. Your mistakes will become abundantly clear, which will provide you with a limitless learning opportunity at a young age. (Amazon was a prime example cited. Both admitted they were surprised by Bezos's ability to become dominant in two very different businesses...online retail and the cloud. Referred to Bezos as being of "a different species". They suggested reading the Amazon 1997 Annual Letter and this interview with Bezos (https://charlierose.com/videos/29412). 
3. Stay Inside Your Circle of Competence - This is where the "Ted Williams Strike Zone" analogy comes from. Buffett points to the fact that Williams hit a much higher percentage of the balls thrown on the inside part of the plate and belt high. As a result, he would remain extremely patient waiting for that pitch. The approach led to one of the highest career batting averages and very few strikeouts. Buffett points out that investors have it even better because we can "take" as many pitches as we want. There are no "called strikes" in investing. For Buffett and Munger, they said their "sweet spot" has been waiting for companies with a durable competitive advantage led by people who are good cultural fits at Berkshire. 

QUICK INVESTOR LESSONS

1. Stay Simple, Be Honest - Munger said everything else doesn't matter if you stray from this. 
2. Fish Where the Fish Are - By "fishing where the most fish are", you increase your chances of catching fish (finding great investments). However, both men believe there are fewer "fish" in the U.S. today, but pockets still do exist...an example being airlines at the current moment. Munger also highlighted that there are infinitely more "fish" in places like China due to their markets being in a much earlier stage. 
3. Compounding - This was Berkshire's 52nd annual meeting and Buffett highlighted that their success has taken a long time to play out. He said that day by day it never felt like they were making that much progress, but highlighted that this is the essence of compounding. You often do not feel it in the moment, but compounding is an incredibly powerful force over time. 
4. Speculation - Buffett pointed to the fact that speculation is one of the worst sins investors can commit, but added that it also leads to the greatest opportunities for sound and patient investors. Munger highlighted that speculation is often highest in societies and markets that are in the early stages of development because experience is the only antidote to treat speculative tendencies. Today, this is true for China.
5. Berkshire's Greatest Advantage - While others are trying to be brilliant, Buffett and Munger say they are focused on simply being rationale. 
6. Where to Look - Look for castles (companies) with a large moat (durable competitive advantages) and a strong knight inside (management).
7. Ben Franklin - Franklin is one of Munger's idols and pointed to his quote that "An ounce of prevention is worth more than a pound of cure"
8. Incentives - Munger is adamant that we should always be mindful of incentives because they drive all of our decisions and actions. Buffett highlighted how the Wells Fargo scandal was largely an issue of misaligned incentives. 

BERKSHIRE'S UNIQUE MODEL

1. Loyal Shareholder Base - Buffett and Munger have built an incredibly loyal shareholder base, which has allowed them to be more flexible and focused on the long-term. Superior returns have certainly helped retain these shareholders, but Buffett and Munger's repeatable and understandable process has not hurt either. 
2. Cash Flow - Berkshire's businesses generate an incredible amount of cash. This means they are always able and willing to look for more good businesses to buy at fair prices. Whether it is through the float from their insurance operations (the premiums they take in up front from policy holders payments before they have to pay out claims) or the cash flow that their businesses generate, they are perpetually dollar cost averaging into investments. Unlike cash constrained investors, they often do not have to sell one asset to buy another one.
3. Private Public Model - Berkshire has an ability to go any place they believe the best values lie. Whether this means buying an entire company like Dairy Queen, or buying a partial stake in a large public company like Apple, Berkshire has an incredible amount of flexibility due to this public/private model. In a world where public markets are getting more efficient and there are fewer easy "fish" to catch, being able to go where the best values lie is paramount. 

THE MARKET TODAY

1. Interest Rates - Buffett mentioned interest rates several times being the key factor both today and looking out into the future. In fact, he said that if someone could grant him one insight about the future, it would be where is the U.S. 10 year rate would be in three, five and ten years. This makes sense on a number of levels, but the keys are the fact that higher interest rates mean more competition from bonds as an asset class and higher discount rates, which could hurt equity valuations. 
2. Capital Intensity - For generations, in order to make a lot of money, companies had to invest a lot of money. Buffett and Munger pointed to the railroad companies laying rail and industrial firms building manufacturing plants as two prime examples. They contrasted that with today’s largest companies (Google, Facebook, etc.) that barely need any equity at all because the dollars needed to generate additional revenue and cash flow is much less...all it takes are clicks. This change could be transformational. 
3. Implications of Artificial Intelligence - Buffett and Munger agreed on most things throughout the day, but this is one area where they disagreed slightly. Buffett appeared to be a pure capitalist believing that Artificial Intelligence will lead to humans having to do less, while enjoying more leisure time. Munger felt much differently and believed that pace was the most important component. He highlighted that if radical changes happens gradually, opposition will be low. If it happens quickly, opposition will be high. 

CONCLUSION

As I sat in my seat for the better part of the day, my mind raced with thoughts, but a few stood out above the rest:

First, these two men are older than most grandparents, healthier than many people thirty years younger, and as sharp as executives in the prime of their careers. While I have no doubt that they are receiving the best healthcare imaginable, it is also difficult to ignore the fact that healthy minds help lead to healthy bodies. 

Second, these men have created an amazing amount of wealth for a lot of people. I plan on writing about this in a separate note, but in short, had you invested in Berkshire Hathaway stock at the start of any decade starting in 1965 and never sold a share, you would be better off than the vast majority of Americans. $1,000 invested in 1965 is worth over $10 million today, $1,000 invested in 1975 is worth close to $4 million today, $1,000 in 1985 comes out to $100,000 today, and $1,000 in 1995 amounts to $8,000 today. This is assuming you actually adhered to Buffett and Munger's advice to sit still, hold onto your shares, and watch compounding work its magic. 

Lastly, this annual meeting and these two men are prime examples of what make this country so great and the envy of the world. They grew up in the heart of the country with relatively modest upbringings, worked at the same grocery store as children, and through the miracle of democracy and capitalism rose to the pinnacle of financial success through hard work and ingenuity. Maybe most importantly, their success has been shared with the hundreds of thousands of people who have worked for and invested in the companies they own and today. Today, they are attempting to touch millions (if not billions) more through education and events like the Berkshire Annual Conference.

Simply amazing. 

T Lamade