At the Berkshire Hathaway Annual Meeting 2022, chairman and CEO Warren Buffett and vice-chairman Charlie Munger were back at their game. They elaborated on their investment decisions, spoke about market trends and follies, and ribbed each other.
We pick some of the highlights from the event.
“Stock markets have become a gamblers parlour”
Buffett and Munger stressed on the erratic behaviour of the market off-late. “The market has been extraordinary,” Buffett said, adding, “Sometimes it is quite investment-oriented, and other times it is almost totally a casino, a gambling parlour, and that existed to an extraordinary degree in the last couple of years, encouraged by Wall Street.”
Sneering at investment bankers and brokerages, he said, “Wall Street makes money, one way or another, catching the crumbs that fall off the table of capitalism. They don’t make money unless people do things, and they get a piece of them. And they make a lot more money when people are gambling,” he said.
Munger too said that there was nearly a “mania of speculation” in the market, with algorithms trading against other algorithms and inexperienced investors being advised by inept brokers. “It is despicable,” said Munger. Into this crazy mix, long-term investments get added in.
The point on the heightened speculation came up while Buffett was tossed a question on why Berkshire had made such huge purchases (nearly $40 billion) less than a month after writing to the shareholders that there weren’t any exciting opportunities.
In the February 26 letter to the shareholders, Buffett had written that he was finding it hard to spot any good opportunity at good prices. But, as a shareholder pointed out at the meet, soon after Berkshire spent $11.6 billion buying insurance conglomerate Alleghany, bought 121 million shares in HP which translates to 11.4% stake, and spent $6 billion to gather 14.6% stake in Occidental Petroleum. (He is also estimated to have hiked his stake in Chevron by $20 billion approximately). Buffett explained that the opportunities came up only after he had written the annual letter.
In all the market madness, “occasionally Berkshire gets a chance to do something… It’s not because we are smart… I think we’re sane. And that is the main requirement in this business”, Buffett said.
2) “We’ve never done well with timing the market”
A shareholder from New Jersey asked how Berkshire has always done well with timing the markets, and cited 1987, 1999, 2000 and other years as examples.
Buffett laughed and replied that the shareholder has a job with Berkshire and the shareholder replied that he will take it, but the conversation then veered back to the market-timing question.
Buffett insisted that Berkshire has never done well with timing the markets. In fact, he said that he missed the opportunity in March 2020. Berkshire, he said, is simply good at figuring out if a good company is going cheap. Sometimes the team hopes the target company stays cheap so that they can buy more of it, he said.
He said that they were complimented for staying optimistic on equities in 2008 when everyone else was turning away from the asset. “We spent a big percentage of our net worth at a very dumb time… we spent about $15 billion or $16 billion (in three or four weeks),” he said. This strategy offers opportunities in good companies that are mispriced because of the general sentiment.
He poked fun at financial advisors who claim that they can time the markets. “Take away the management fees and I’d bet on the monkey throwing darts at the board,” he said, implying that the advisors’ right bets are more chance than skill.
Munger chimed in saying “people are charging for their skill and delivering closet indexation”. He called fund managers–who are acting in sync so as not to fall behind their peers and the market and lose their fee–“wildly ridiculous”.
.“Inflation swindles almost everybody”
Answering a question on whether he continues to be of the view that inflation will eat into equity returns, Buffett said that the damage from rising prices affects everybody including equity investors, bond investors and even those who keep their cash under the mattress. Buffett said that inflation also raises the amount of capital that companies need to have and that it isn’t as simple as raising prices to simply maintain inflation-adjusted profits.
Buffett added that it would be better for both business and investors in general if we could have a totally stable unit of monetary use, but nobody can tell that. “Nobody knows how much inflation will be in the next 50 years or next month,” he said. There is a lot of curiosity around that question and people may say they know the answer but no one really knows, Buffett said.
Buffett said Berkshire companies have seen extraordinary inflation too.
Explaining the phenomenon Buffett said, the Federal Reserve’s balance-sheet has currency in circulation of $2.2 trillion currently. That’s about $7,000 per person, considering that there are 330 million people in the United States. Although one does not know where exactly this money resides, a lot of money has been sent out to businesses and people, and that the economy is getting it one way or the other, which is resulting in additional demand at a time when there are supply constraints, causing prices to rise.
When asked about how inflation this time around compares with periods in the past, Buffett said nothing in economics, including inflation, is ever the same the next time it happens because circumstances are different and people behave differently every time.
Notwithstanding the inflation, Buffett believes if the Fed had not done effected the monetary injection, it would have been a far worse situation. “In my book, J Powell (Fed Chairman Jerome Powell) is a hero,” Buffett said. “He did what he had to do.”
Buffett recommended Nick Timiraos’ book titled Trillion Dollar Triage, for a better understanding on the role the central bank played then. The book claims that Powell’s quick actions prevented an economic disaster.
“Cash is like oxygen. If you don’t have it for a few minutes, it’s all over”
Warren Buffett and Charlie Munger have always been advocates of holding cash. In 2021, Berkshire Hathaway had $144 billion in cash and treasury bills and, as of March 31, 2022, it had come down by a third after buying equities but it was still substantial at $103 billion (approximately).
Buffett and Munger had decided early on to always hold $30 billion in cash, and Buffett had reiterated this in the 2021 annual report.
“We will always have cash on hand,” said Buffett in the meeting. “In 2008 and 2009, we didn’t own commercial paper, we didn’t have money market funds.. We had treasury bills. We believe in having cash. If you don’t have cash, you don’t get to play the next day. It is like oxygen, it is there all the time and if you don’t have it for a few minutes, it is all over.” Recounting the pain businesses faced during the pandemic, he said, “We want Berkshire Hathaway to be in a position to operate if the economy stops. And that can always happen, that can always happen,” he said.
Buffett held up a $20-dollar note and said that is what counted as legal tender for all debts public and private. “That makes it money. You can go into our candy store and offer us enough bushels of wheat, we will give you enough candy. But money is the only thing that the IRS (the Internal Revenue Service) is going to take from you. You can offer them all kinds of things… but money is what settles debts in the United States,” said emphasising the utility of cash.
5) “Things cannot claim value only because someone else is willing to pay more for it”
Buffet and Munger have been critical of bitcoin for the longest time. Unsurprisingly, bitcoins were roundly denounced at the meeting.
Buffett said that he would write a check for 1% stake in all the farmland in the US or for the same percentage in all the apartment houses in the country. But instead, if someone offered him all the Bitcoin in the world for $25, he wouldn’t take it.
“What would I do with it,” he asked.
According to him, assets must deliver something to someone to have value. Things cannot claim value only because someone else is willing to pay more for it.
For example, a dollar can get you a cup of coffee or a piece of cake. A painting can deliver a transformative experience. But, a cryptocurrency can only be sold forward for a higher price and cannot really buy anyone anything in the general market.
Munger was more biblical in his pronouncements. He called bitcoin stupid and evil. Stupid because he expects its value to come down to zero, and evil because it can destabilise the US financial system.
6. “So much better companies at so much lower prices in China…”
China’s recent aggressive action against companies doesn’t seem to worry Munger significantly.
At Berkshire, he has been bullish on the country for a long time. Therefore, he took a question from a shareholder, on the risks in investing in countries with authoritarian regimes, particularly China. “There’s no question about the fact that the government of China has worried the investors from the United States,” Munger said. “There is some tension and it has affected the prices of some of the Chinese internet stocks.” Munger acknowledged that there are more difficulties dealing with the regime in China than there are in the United States. “And it’s different, it’s a long way away…”But he added that there are signs that the government is recognising the effect it has had, and is indicating pullbacks. “So we are having some hopeful signs,” he said.
He defended his continued optimism on the country. “The reason I stay invested there is I get so much better companies at so much lower prices,” said Munger. “I am willing to take a little bit more risk to get into the better companies with the lower prices. Other people might reach a different conclusion (since) everybody is more worried about China now than they were 50 years ago. That is just the way it is,” he said.