Podcast Summary
Insights from Berkshire Hathaway Annual Shareholders Meeting: Warren Buffett and Charlie Munger reassured listeners of Berkshire Hathaway's continued value, with operating earnings growing 20% YoY and the stock experiencing a quiet tear. Berkshire's undervaluation can be revealed using Whitney Tilson's 2-column model, considering cash, investments, and a sensitive multiple of operating earnings.
Learning from this episode of The Investors Podcast is the continued value of Berkshire Hathaway as an investment, despite it often being overlooked due to the lack of excitement compared to FAANG stocks. During the Berkshire Hathaway Annual Shareholders Meeting, Warren Buffett and Charlie Munger provided insights that reassured listeners that Buffett wasn't greedy during the pandemic and that they continue to buy back Berkshire stock in the open market. Additionally, Berkshire's operating earnings grew 20% year over year in Q1, and the company is currently experiencing a quiet tear in the stock market. A simple valuation method, such as Whitney Tilson's 2-column model, can reveal that Berkshire's stock is undervalued, even with its recent growth. This method takes into account the cash and investments per share and a multiple of the pretax earnings of all the operating businesses. The multiple is sensitive to market fluctuations, making it an essential factor to consider when valuing Berkshire Hathaway. Overall, the Berkshire Hathaway Annual Shareholders Meeting provided valuable insights for stock investors, emphasizing the importance of staying informed and utilizing effective valuation methods.
The importance of adaptability in business: Warren Buffett emphasized the unpredictability of global business landscape and the importance of adaptability, suggesting investors consider index funds and staying informed.
The importance of adaptability and change in the business world, as highlighted by Warren Buffett in his keynote speech. Buffett emphasized that no one could have predicted the shift from Japanese to US dominance in the global business landscape over the past few decades. He also suggested that investors should consider investing in index funds due to the unpredictability of individual stock performance. Buffett's investment in Alibaba, despite its Chinese origin, further underscores his adaptability to changing market conditions. Overall, the discussion underscores the importance of staying informed and adaptable in an ever-changing business environment.
Buffett's Decentralized Approach to Leadership during the Pandemic: Buffett took a more cautious approach to investing during the pandemic, with Berkshire not seeking government aid and a decentralized leadership structure for the company, with Greg Abel as the likely successor to Buffett as CEO of non-insurance businesses.
Warren Buffett and Berkshire Hathaway's approach to investing during the early months of the COVID-19 pandemic was not as aggressive as some may have expected, given Buffett's reputation for buying when others are fearful. Buffett explained that Berkshire had a few subsidiaries that sought government help during the crisis, but Berkshire itself did not apply for aid. The airlines, which were the most prominent recipients of government assistance, were not to blame for the crisis, according to Buffett. Instead, he wished the aid could have been distributed more broadly to small businesses. Buffett's role in the company will be decentralized, with his responsibilities being divided among Greg Abel, Ajit Jain, Ted Weschler, Todd Combs, and his oldest son Howard Buffett, who will serve as non-executive chairman. The transition to decentralized leadership was unexpected, and it seems that Greg Abel will be the primary successor to Buffett as CEO of non-insurance businesses.
Buffett Cautious with Cash during Early Recovery: Buffett prioritized risk minimization over bold investments during the early stages of the economic recovery, and ultimately sold his airline positions to maintain a larger cash position.
Warren Buffett, the CEO of Berkshire Hathaway, did not deploy a large amount of cash during the early stages of the economic recovery from the 2020 recession due to the significant risks involved. Buffett had a significant exposure to the airline industry through investments in American Express and Precision Castparts, and he considered this exposure as part of the portfolio risk. He mentioned that the net sales during that period were only around 1% or 1.5%, and the risks on the table were immense. Buffett emphasized that his role is to minimize risks and avoid significant losses, rather than making bold investments at the trough of a recession. He also noted that no one can predict the exact bottom of the market, and it is important to be cautious when deploying large amounts of capital. Despite the expectations of some that Buffett would make a major investment during this period, he ultimately sold his airline positions and kept a larger cash position in Berkshire's portfolio.
Warren Buffett's Decision Not to Invest Heavily During Market Crash Influenced by Fed Intervention and Berkshire's Tied-Up Cash: Despite having a large cash reserve, Warren Buffett did not invest heavily during the 2020 market crash due to the unexpected Fed intervention and significant portion of Berkshire's cash tied up in insurance claims and business support.
Warren Buffett's decision not to invest heavily during the market crash in 2020, despite having a large cash reserve, was influenced by the unexpected intervention of the Federal Reserve and the subsequent recovery of the market. Stig Brodersen highlighted that it was a scary time, and many didn't take the pandemic seriously until the stock market took a dive. Buffett, like many value investors, felt the market was overvalued before the correction. The Berkshire Hathaway executives also explained that a significant portion of their cash was tied up in insurance claims and supporting their existing businesses. A question from a viewer about Berkshire's sale of Apple stocks and lack of additional purchases in 2020 was addressed, with Buffett expressing his high regard for Apple as a business and its management, as well as the company's strong consumer loyalty.
Apple's Impact on Lives and Berkshire Hathaway's Profitable Investment: Apple's impact on people's lives and Berkshire Hathaway's successful investment, with Buffett and Munger's belief in the company's importance and competitiveness under Cook's leadership, resulting in significant growth and profit.
Apple, under the leadership of Tim Cook, has become an indispensable product and business for many people, with a significant impact on their lives. Buffett and Munger's investment in Apple, initially costing $31 billion with a cost basis of $12 times earnings, has seen remarkable growth with the current net income of $76 billion and earnings multiples closer to 30. Despite selling off $11 billion worth of shares, the investment has proven to be a huge bargain. The duo's belief in the company's importance and competitiveness, as well as Cook's effective management, has made Apple a credit to American civilization and a leading American tech giant.
Warren Buffett's successful investment in Apple: Buffett's investment in Apple brought in over $100 billion in profit, demonstrating his ability to identify undervalued companies. Despite selling a portion, he continues to hold onto quality companies for the long term.
Warren Buffett's investment in Apple, which has brought in over $100 billion in profit, is a testament to his keen business acumen and his ability to identify undervalued companies, even in industries outside of his typical portfolio. Despite the massive success of this investment, Buffett's decision to sell a portion of Berkshire Hathaway's Apple holdings remains puzzling to some, as Apple continues to grow and thrive. The debate over the timing of this sale and its implications for Berkshire's overall strategy highlights the challenges and uncertainties that even the most successful investors face in managing their portfolios. Ultimately, the Apple investment serves as a reminder of Buffett's long-term approach to investing and his belief in the value of holding onto quality companies for the long haul.
Uncertain Consequences of Modern Monetary Theory and Low-Interest-Rates: MMT's claim of US debt capacity is debatable, low-interest-rates may lead to inflation and asset price bubbles, Buffett and Munger warn of potential disastrous consequences, and uncertainty highlights the need for caution
Modern Monetary Theory (MMT) suggests the US can take on vast amounts of debt due to its status as the world's reserve currency, but there are limits to this theory, and the long-term consequences, including potential rampant inflation, are uncertain. Buffett and Munger expressed concerns about the current low-interest-rate environment and its potential consequences, such as the devaluation of float and the push for money to go into asset prices instead of the real economy. While some argue that low interest rates are necessary to drive the economy, Buffett and Munger believe that there will eventually be disastrous consequences. Additionally, Buffett does not believe that current stock valuations are crazy, despite their seemingly high numbers in a low-interest-rate environment. Ultimately, the uncertainty surrounding the long-term effects of current economic policies underscores the importance of remaining adaptable and cautious.
Economic stability can lead to instability: Munger and Buffett discussed the risks of prolonged economic stability, Buffett's concerns about finding investment opportunities, Minsky's theory, potential use of debt, and importance of considering different perspectives.
Key takeaway from the discussion between Charlie Munger and Warren Buffett is the potential risks and instability that come with prolonged periods of economic stability and easy access to capital. Buffett expressed his concern about the large amount of cash Berkshire Holds and the challenges of finding attractive investment opportunities in the current market. Munger drew parallels to economist Hyman Minsky's theory that stability can lead to instability. Additionally, Buffett and Munger discussed the possibility of employing debt to take advantage of attractive long-term borrowing rates. The debate around Modern Monetary Theory (MMT) also came up, with Munger expressing skepticism towards the idea that governments can print money without consequences. Ultimately, both Munger and Buffett emphasized the importance of remaining humble and considering different perspectives in the face of complex economic issues.
The Importance of Humility and Open-Mindedness in Learning and Growth: Even the smartest minds acknowledge their fallibility and the importance of humility and open-mindedness in learning and growing, particularly in the context of financial advice.
Even the most intelligent and successful individuals, such as Charlie Munger and Warren Buffett, acknowledge that they don't have all the answers. While they have accumulated vast knowledge and experience over their long careers, they recognize the importance of humility and being open-minded. This dynamic was evident during a discussion about share repurchases, where they expressed their views but also acknowledged the complexity of the issue and the possibility that they might be wrong. This reminder of human fallibility is a valuable lesson for all of us, as we strive to learn and grow in our own lives. Furthermore, the conversation also touched on the importance of wisdom and intelligence, particularly in the context of financial advice. Buffett and Munger are respected for their expertise, and their insights can be valuable to those seeking to make informed financial decisions. However, it's important to remember that even the smartest minds can make mistakes, and that humility and open-mindedness are essential qualities for anyone seeking to profit from the markets. Overall, the discussion highlighted the importance of balance and perspective in approaching complex issues, and the value of recognizing the limitations of our own knowledge. By staying humble and open-minded, we can learn from the wisdom of those who have come before us, while also remaining aware of the uncertainty and complexity of the world around us.
Share buybacks: A logical and moral way for companies to distribute cash: Share buybacks, funded by taxed company profits, can benefit shareholders and companies, and are not inherently immoral.
Share buybacks, while often criticized as market manipulation, can be a beneficial way for companies to distribute cash to shareholders who want it, while also being a moral act in the interest of existing shareholders. The argument against share buybacks being immoral often stems from the idea that the company is not paying taxes on unrealized gains or that the seller of the shares being repurchased is paying capital gains tax. However, it's important to note that share buybacks can only be funded with tax funds from the company, and someone is always on the other side of the trade, meaning the seller will also be paying taxes. Additionally, reinvesting profits in the business, rather than paying dividends or repurchasing shares, can be an even more tax-efficient strategy for both the company and the investor. The example given was Amazon, which reinvested profits instead of paying taxes for a long time and has since started paying taxes while creating employment and continuing to grow. Overall, share buybacks can be a logical and moral way for companies to distribute cash to shareholders who want it, while also benefiting the existing shareholders and the company as a whole.
Berkshire Hathaway's commitment to share buybacks: Berkshire Hathaway's $25B share buybacks in 2020 and continued trend in 2021 demonstrate its commitment to enhancing value for current shareholders, despite its large size and long-term investor base.
Berkshire Hathaway's share repurchasing strategy is a significant reason for the bull case on the company, especially as the new management may continue this trend due to the limited acquisition opportunities for a company of its size. The speakers also highlighted their appreciation for Berkshire's approach to share buybacks, where directors buy in the open market and have substantial holdings in the company. Berkshire's share repurchases totaled $25 billion in 2020, and the trend has continued in 2021. Despite the company's lower trading volume due to its large size and long-term investor base, Berkshire's share repurchases demonstrate its commitment to enhancing value for its current shareholders. While the speakers acknowledged the importance of dividends in calculating shareholder yield, they criticized companies that issue shares to themselves and then buy back shares to claim a positive shareholder yield. Overall, the speakers' discussion emphasized the importance of thoughtful and value-enhancing share repurchasing strategies in creating long-term value for shareholders.
Buffett sees undervalued Berkshire, may buy back shares at discount: Buffett believes Berkshire is undervalued and may buy back shares at a 20% discount to conservative estimates of intrinsic value.
Warren Buffett and his team at Berkshire Hathaway believe the company is undervalued based on their conservative estimates of intrinsic value. Buffett has consistently stated that he would only buy back shares at a discount to this value, and Berkshire's large asset base compared to its market cap suggests a potential discount of around 20%. Buffett's specific share buyback amounts, which are reported to the SEC, may indicate a deliberate approach to not moving the market too much as he builds positions. The Berkshire Hathaway Annual Shareholder Meeting was a special occasion, with the return of Charlie Munger and an overall sense of energy despite the virtual format.
Investigating with the Scuttlebutt method: Researching beyond annual reports and financial statements: Thorough research and determination are crucial for successful Scuttlebutt method application, even without direct access to management. Speak to everyone with knowledge, utilize annual reports and financial statements as starting points, and continuously improve your understanding.
Importance of thorough research and determination in applying the Scuttlebutt method for investing, even without direct access to key management personnel. Buffett and Fisher emphasized the value of speaking to everyone with knowledge about a company and utilizing annual reports and financial statements as starting points. While it may seem challenging to gain access to management, focusing on in-depth research and analysis can lead to valuable insights. Additionally, the conversation highlighted the ongoing nature of learning and investing, encouraging continuous improvement and exploration.
Speak with industry experts for valuable insights: Talk to knowledgeable individuals in the industry for a deeper understanding of the business model, costs, and operations, which can enhance investment analysis.
When conducting research for investing in a particular stock, it's essential to speak with knowledgeable people who have a deep understanding of the industry or business, rather than just fellow investors or management. These individuals can provide valuable insights into the business model, costs, and operations that can help inform your investment analysis. While it's important to do your own research and come prepared with specific questions, reaching out to experts in the field can provide a more comprehensive understanding of the investment opportunity. However, it's important to note that there are biases to consider when speaking with individuals who are bullish on the stock, so seeking out critical perspectives is also important. Ultimately, speaking with industry experts can provide valuable insights that may not be readily available from management or other investors and can help inform a more well-rounded investment analysis.
Forming a Mastermind Group for constructive feedback and open dialogue: Engage in active learning, challenge assumptions, evaluate management through debt and interest coverage, take a small position for insights, and own a stake to enhance communication
Effective learning and successful investing involve active engagement and a willingness to challenge assumptions. Stig Brodersen emphasizes the importance of forming a Mastermind Group for open dialogue and constructive feedback. Trey Lockerbie suggests starting with evaluating a company's management by looking at their debt management and interest coverage ratio. Additionally, taking a small position in a company can provide valuable insights and help alleviate fear of missing out. Buffett and Gayner, successful investors, have adopted this approach. Lastly, having "skin in the game" through owning a small position in a company enhances learning and communication with stakeholders.
Appreciation gift for a great question: Focus on learning and deepening understanding of a company after first investment, not rushing to full position. Free resources for further learning offered.
Investing is a learning process, and you don't need to rush to reach a full position in a stock right away. Instead, focus on starting your learning journey and deepening your understanding of a company once you've made your first investment. As a token of appreciation for a great question from a listener, Trey Lockerbie and Stig Brodersen offered Alvin free access to their TIP Finance tool and intrinsic value course for those interested in learning how to invest like Warren Buffett. Don't forget to follow them on Apple Podcasts, Spotify, and other podcast platforms for more valuable investing insights. And if you have any questions, feel free to ask at asktheinvestors.com. Remember, the key to financial independence lies in continuous learning and smart investing. Happy investing!
