There might just be a handful of things that the Oracle of Omaha might have set his mind on but was unable to accomplish. As he concluded last year’s virtual meeting, he said, “We will see you next year. We will fill this place.” Unfortunately, that did not come to pass as the aftereffects of the pandemic lingered and for the second consecutive year, the Berkshire Hathaway Annual Meeting was held virtually. Unlike 2020, the 2021 meeting was held in Los Angeles so that vice chairman Charlie Munger could be alongside CEO Warren Buffett. Also, on stage were vice chairman Ajit Jain and “vice chairman in charge of everything except insurance and investments” and heir apparent, Greg Abel. The succession announcement was due for a while and during the Q&A, Munger let it be known that “Greg will keep the culture”. While an official declaration followed soon after, this year’s Q&A had its share of wisdom with Buffett focusing on “short lessons for new investors that have entered the market in the last year”, SPACs making acquisition harder for Berkshire and why tech majors like Apple and Google seem ‘cheap’ in this negative interest rate environment.
You are known for saying – ‘Be fearful when others are greedy and be greedy when others are fearful.’ But Berkshire was fearful in the early months of COVID, dumping airline stocks at or near the low and did not buy other shares at exceptional discounts.
WB: The airlines got $25 billion initially, most of which went to the big four airlines and some of which went in as grants, not loans. It was not like 2008-2009 when people blamed the banks and hated to see them helped. With the airlines, clearly what happened was not their fault in any way, shape or form.
But they had lost a significant amount of money and prospective earning power. People really want to travel for personal reasons, and business travel is another thing. Right now, international travel has not come back but the airlines have done better but I still wouldn’t want to buy the airline business.
We have got a big exposure to business travel as we own 19% of American Express, and we own Precision Castparts, which services the airline business. So, we have still got a big investment in air travel, but we wish the Big Four the best. I think their managements have done a very good job during this period.
We learnt something out of 2008 and 2009, and we applied it, but I don’t think it was a sure thing that would happen. The one thing about Berkshire is, we don’t want to depend on anybody. We are not a bank; we can’t go to the Federal Reserve if we need money. Blanche DuBois in, A Streetcar Named Desire, said, “I depend on the kindness of strangers.” You can’t depend on the kindness of your friends, if things really stop. I have seen that in several different places.
We were seeing it in the middle of March, everybody was drawing down their credit lines. The banks just weren’t sure they were going to be able to draw their credit lines 10 days later. So, they just drew them down and took money out of money market funds. I give great credit on both the monetary and fiscal side of what was done, but I did not think it was a sure thing that would happen. I did not know how it would be implemented. It has worked better than anybody has expected.
CM: It is crazy to think anybody is going to be smart enough to husband money and then just come out on the bottom tick in some crazy crisis and spend it all. Anybody who expects that of Berkshire Hathaway is out of his mind.
After 15 years of market underperformance, you are cautious about predicting Berkshire being able to outperform the market in the future. Given this, why should long-time shareholders continue holding their stock?
CM: I personally prefer holding Berkshire to holding the market. I am quite comfortable holding Berkshire as I think our businesses are better than the average in the market.
WB: I recommend the S&P 500 Index Fund and have for a long time to people as I do not think the average person can pick stocks. I have never recommended Berkshire to anybody because I don’t want people to buy it, because they think I am tipping them into something. I have made it public. On my death, there is a fund for my then-widow, and 90% will go into an S&P 500 Index Fund, and 10% in Treasury Bills. On the other hand, I am very happy having my future contributions to a group of charities, that will be spread over 12 years or so after my death, to stay in Berkshire.
We have a very unusual group of shareholders who look at Berkshire as a lifetime savings vehicle, and one they don’t have to think about, and if they don’t look at it for 10 or 20 years, we will have taken care of the money reasonably well. I like Berkshire, but I think that a person who does not know anything about stocks at all, and doesn’t have any special feelings about Berkshire, I think they ought to buy the S&P 500 Index.
Is it reasonable to think that over the long-term, Berkshire should focus on plain vanilla short tail insurance businesses like GEICO, and reduce the size of long tail risk? Will Berkshire’s underwriting prowess continue to be maintained going forward?
AJ: Clearly, contract certainty is an issue for us in the insurance industry. It is an issue that cuts across not only the long tail lines but even short tail property-focused lines. The most recent example is business interruption, which is an integral part of any property insurance policy that is bought and sold by corporations.
It is a risk every time we issue a contract that either because of sloppiness, in terms of how that contract is written, or because of the regulatory environment we all have to live in, that the words in the contract may be tortured. Normally when they are tortured, they ended up going against the insurance industry, not in their favour.
It is a risk, it’s an unknown risk, in terms of how bad it can be. I hope we price for it, when we price for the product, throw in something for the unknown unknowns, if you will. And we try and aggregate our exposure by major risks categories. Hopefully, that will give us some comfort in terms of having some boundaries on what the exposure really can be.
But there’s no question, the regulators play a very important role in terms of the economics of the business, especially in the US, where there are 50 state regulators who we have to deal with in terms of pricing and in terms of contracts.
WB: Most of the surprises in insurance are unpleasant. You get the premium upfront, that’s pleasant, and then from thereon you get some very imaginative losses that come through, and you get some that you have taken on. We are willing to lose, in terms of the outside limit, $10 billion in a single event and we want to get paid very appropriately for that, but we got the resources to do it. But. we don’t want to lose $10 billion in something where we only thought we could lose $50 million or something like that.
A defining feature of Berkshire has been the strong bond between Buffett and Munger. How do incoming managers Ajit Jain and Greg Abel interact with each other?
AJ: There’s no question that the relationship Warren has with Charlie is unique. It is not going to be duplicated, certainly, not by me and Greg. Nevertheless, both Greg and I, at least, certainly from my perspective, and I am sure Greg will speak for himself, we have known each other for a very long time. We do not interact with each other as often as Warren and Charlie do, but every quarter we talk to each other about our respective businesses.
During the quarter, while we may not have any formal meetings, but every time a question comes up, which is related to insurance, Greg will call me. By the same token, if there’s any question that comes up relating to any of the non-insurance operations that Greg is in charge of, like we had recently where a client of mine was trying to find a buyer, I talked to Greg about how best to proceed. We have a perfectly well-functioning relationship between the two of us and I hope it remains that way.
GA: Warren and Charlie have an exceptional relationship, but I am very proud of the relationship Ajit and I have had. It has developed over many years as I have had the opportunity to see how Ajit has run the insurance business. As Warren and Charlie highlight, there is no one better at it. Even though the interaction may be different than, say, how Warren and Charlie do it, as Ajit touched on, there is a regular dialogue, both around opportunities within our two businesses and units, both if we see something unusual that the other individual should hear, we make sure we are always following up with each other.
But it goes beyond that, Ajit has a great understanding of the Berkshire culture. I strongly believe I do too. Anytime we see anything unusual in one of our businesses, its Ajit who I am going to call and say, “Are you comfortable that we are taking this approach? Is it going to be consistent with how you think about it? How you think about it in insurance?” So, it goes beyond just discussing the businesses, but maintaining the exceptional culture we have at Berkshire and building upon that.
Berkshire eventually bought Apple in 2016, because of the quality of the business and management. How do you assess if tech stocks are worth investing at crazy high valuation?
WB: We don’t think they are crazy and that gets back to something fundamental in investments. Essentially, interest rates are to the value of assets, what gravity is to matter. So, you have had this incredible change in the valuation of everything that produces money, because the risk-free rate produces nothing.
But if the present rates were destined to be appropriate, if the 10-year should really be at the price it is, tech companies are a bargain. They have the ability to deliver cash at a rate that, if you discount back at present interest rates, those stocks seem very cheap.
Now, the question is what interest rates do over time. But there is a view of what interest rates will be based in the yield curve out to 30 years and so on. But in economics, there is one thing always to remember, you can never do one thing, you always have to say, “And then what?” If it does not cause anything else, you can count on it, continuing in a very big way. But there are consequences to everything in economics.
That is why the Googles and the Apples are incredible companies, in terms of what they earn on capital. They don’t require a lot of capital, and they gush out more money. So, we will see where it all leads, but Charlie and I consider it the most interesting movie by far we have ever seen in terms of economics.
CM: I don’t think any of us know what’s going to happen with this stuff. I do think there is a good chance that this extreme conduct is more feasible than everybody thought. But I do know if you keep just doing it without any limit, it will end in disaster.
What impact does the rise of Special Purpose Acquisition Companies (SPACs) have on Berkshire’s ability to find and close new acquisitions?
WB: It is a killer. These SPACs generally have to spend their money in two years as I understand it. If you put a gun to my head and said, you got to buy a big business in two years, I would buy one, but it would not be much of one. If you are running money for somebody else and you are getting paid a fee and you get the upside and you don’t have the downside, you are going to buy something.
That won’t go on forever, but it’s where the money is now, and Wall Street goes where the money is. SPACs have been working for a while, you stick a famous name on it, you can sell almost anything. It is an exaggerated version of what we have seen in gambling-type market. Keynes wrote in 1936 in The General Theory, that, “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital element of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.”
We have had a lot of people in the casino last year. You have millions and millions of people who have set up accounts where they daytrade and are selling puts and calls. You had the greatest increase in the number of gamblers, essentially. Nobody tells you when the clock is going to strike 12:00, and it all turns to pumpkins and mice. But when the competition is playing with other people’s money, or if they are playing foolishly with their own money, but the big stuff is done with other people’s money, they are going to beat us. We are not going to have much luck on acquisitions while this sort of a period continues.
CM: I call it fee-driven buying. In other words, it is not buying because it is a good investment. They are buying it because the advisor gets a fee, and of course the more of that you get, the sillier your civilisation is getting. To some extent, it is a moral failing, too, because the easy money made by things like SPACs and you push that to excess, it causes horrible problems with the civilisation and reflects no credit on the people who are doing it, and no credit on the regulators and voters that allow it. I think we have a lot to be ashamed of current conditions. It is not just stupid, it is shameful.
What has COVID-19 taught Berkshire about systemic and correlated risk? Is there anything that it will do differently from now on?
AJ: The big lesson for us is that while we were aware that pandemic is a risk factor, it is totally under-priced by all of us in the industry. Several of us thought it is an event that will happen at most, once in a hundred years, but even those odds are pretty high. The big lesson for us is to recalibrate and rethink about what the return time is for something like a pandemic risk and separately, we haven’t yet done a good enough job in terms of correlating and aggregating the risk and making sure we can deal with the aggregate numbers.
For example, pandemic risk has obviously taken people’s lives, but then separately, a bunch of us used to write something called event cancellation or contingency policies, and in terms of pricing for the contingency policies, like the Olympics being cancelled, NBC would buy insurance for their rights, which might suddenly be not worth much. When pricing something like that, we would think in terms of earthquake and risk and more recently terrorism, but we would never factor something like what portion of the price should come from the pandemic exposure. I think the industry will become a lot more sophisticated in terms of thinking through the impact of pandemic risks across the entire portfolio, as opposed to it just being localised to one or two areas.
Precision Castparts’ earnings declined substantially in 2020 because of the pandemic and the effect of airline and travel industry. What calculations could you have made in 2016 that might have altered your decision to acquire it?
WB: Anytime we look at buying a business, we are evaluating the competitive strengths of the business, the price we have to pay, the management we get, everything. We didn’t make a mistake on the management, but in terms of the earning power on average. When Boeing has troubles with MAX, well, that’s a probability. I mean, anytime any customer that big, all kinds of things are going to happen. We have seen some of those things happen, and therefore I paid too much in relation to average earnings. It is a terrific company, but GE doesn’t need as many engines as we thought they would need.
We have got some wonderful deals and some terrible deals. The nice thing about it is, and this doesn’t really apply in the case of Precision precisely, when we are disappointed in a business, it usually becomes a smaller and smaller percentage of our business, because it isn’t going any place. When we get a successful business, like GEICO or something of the sort, they are doing 15X as much business when we bought control in 1996, they become a proportionally much more important part of our mix. You really get, through just natural forces, you get more of your money in the things that have developed more favourably than you thought. You end up getting a greater concentration in the ones that work out.
Now that the crypto market overall is valued at $2 trillion, do you still consider crypto as worthless artificial gold?
WB: I knew there would be a question on Bitcoin. I thought to myself, “Well, I have watched these politicians dodge questions all the time.” I always find it kind of disgusting but they do it. The truth is, I am going to dodge that question because we have probably got hundreds of thousands of people watching this that own Bitcoin, and we have got two people that are short.
We have got a choice of making 400,000 people mad at us and unhappy and/or making two people happy. That is just a dumb equation. I thought about it, we had a Governor one-time in Nebraska, a long time ago. He would get a tough question, ‘What do you think about property taxes or what should we do about schools?’ He would look right at the person, and he would say, “I am all right on that one,” and he would just walk off. Well, I am all right on that one and maybe we will see how Charlie is.
CM: Those who know me well are just waving the red flag at the bull. Of course, I hate the Bitcoin success and I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth. Nor do I like just shuffling out a few extra billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air. I think I should say modestly that the whole damn development is disgusting and contrary to the interests of civilisation, and I will leave the criticism to others.
WB: I am all right on that one.
Suppose the hypothetical situation arises that Elon Musk contacts Warren Buffett about writing an insurance policy on his proposed mission to and subsequent colonisation of Mars. Would Ajit Jain underwrite any portion of a venture like that?
AJ: This is an easy one. No, thank you. I will pass.
WB: I would say it would depend on the premium, and I would say that I would probably have a somewhat different rate if Elon was on board or not on board. I mean, it makes a difference. If somebody is asking you to insure something, that is called getting skin in the game.
AJ: In general, I would be very concerned about writing an insurance policy where Elon Musk is on the other side.
WB: Tell Elon to call me and set up Ajit.
Will high-growth technology companies constitute a larger proportion of Berkshire’s investment portfolio over time, particularly as Ted and Todd take on larger roles in the investment decision process?
WB: We have always known that the green business is the one that takes very little capital and grows a lot, and Apple and Google and Microsoft and Facebook are terrific examples of that. Apple has $37 billion in property, plant, equipment, Berkshire has $170 billion or something like that, and they are going to make a lot more money than we do. It is a much better business than we have, and so do Microsoft and Google.
We have known that a long time. We found that out with See’s Candies in 1972. See’s just doesn’t require that much capital. It has a couple of manufacturing plants. They call them ‘kitchens’ but it doesn’t have big inventories, except seasonally for a short period. It doesn’t have a lot of receivables. They are the best businesses, but they command the best prices, too. There aren’t that many of them, and they don’t always stay that way.
We are looking for them all the time but that’s what everybody’s looking for. That’s what capitalism is about, people getting a return on capital. The way you get it is having something that does not take too much capital. Utility business is not a super high-return business. You just have to put out a lot of capital. You get a return on that capital, but you don’t get fabulous return. You don’t get Google-like return or anything remotely close to it.
What are your current thoughts on China and whether the Communist leaders will allow businesses with strong leadership to flourish in decades to come?
CM: I think the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed Communists just looked at the prosperity of places like Singapore and said, “The hell with this, we are not going to stay here in poverty. We’re going to copy what works.” They changed communism. They just accepted Adam Smith and added it to their Communism. Now we have Communism with Chinese characteristics, which is China with a free market with a bunch of billionaires and so forth. They made that shift. They deserve a lot of credit. Warren and I are not quite as good at that, at changing our minds, in many cases.
That was a remarkable change coming from such a place. Of course, it has worked like gangbusters. They have had enormous growth in the average income of the average Chinese. They have lifted 800 million people out of poverty fast. There was never anything like it in the history of the world, so my hat is off to the Chinese. I think they will continue to allow people to make money. They have learnt it works. I love what the guy said in the first place, “I don’t care whether the cat is black or white, as long as it catches mice.” That is my kind of talk.
WB: In the list of the 20 most valuable companies in the world, three are Chinese. Now, if you are looking out 30 years, how many do you think will be Chinese? My guess is more, but I don’t think it will top the United States, but who knows? It is amazing what has been accomplished.
They found what works. I mean, there is nothing like finding something that works to reinforce ideas over time. We will see what happens, but I would bet there will be more than three, but I will bet the United States has more than China has, too.
Why did you exit most of your bank stocks in 2020 except for Bank of America? What is your view on the future of the banking industry?
WB: I like banks, generally. I just didn’t like the proportion we had in it, compared to the possible risk at least, if we got bad results that so far we haven’t gotten. We were over 10% of Bank of America. We took that up, but we took the overall bank position down. We didn’t want to go above 10% in any of the others, and we did want to increase the BofA position, but we overall didn’t want as much in banks as we had.
The banking business is way better than it was, in the United States 10 or 15 years ago. The banking business around the world, various places, is what might worry me, but our banks are in far, far better shape than 10 or 15 years ago. But when things froze for a short period of time, the biggest thing the banks had going for them is the Federal Reserve was behind them. The Federal Reserve is not behind Berkshire. It is up to us to take care of ourselves.
Is there a time that could come when Berkshire is too large and complex? Should there be concern over the lack of information for most of Berkshire’s companies?
WB: It is too large to do certain things, that is for sure. We can’t spend our time looking for $100 million acquisitions. We have a wonderful company in Fort Worth, and we had a marvellous man running it and he died recently. He sold it to me 15 years ago and he just basically ran it. We have got this terrific company that makes recreational vehicles in Elkhart, Indiana and I have never been there. Maybe there is some closet just making up numbers to send to me every month. I have never seen it and the fellow that runs it likes running it and he likes me keeping my nose out of it.
He will let Greg in a little more than he will let me, but we have got a system that will work with wonderful businesses and wonderful managers. It is up to us to find them, but it is also up to us to nurture them when we find them. If you will get somebody like Paul Andrews who ran TTI and who built it from nothing, absolutely nothing, nobody ever heard of him, the earnings octupled during the period that he ran it for us. He was happy, employees were happy. He was a wonderful man.
It is ridiculous to think of a guy like Paul Andrews behaving in an antisocial manner or anything of the sort. We would love to have more of those. Obviously, we got bigger, they get harder to buy, but we have got a number in the place. I don’t think we bought our last one over time, but I certainly don’t see anything in the near future at all. But we are intensifying our interest a little bit in the ones we have, by repurchasing shares. So our shareholders own more of those companies every year.
CM: I don’t think we are getting too big to manage because we are different from practically every other big corporation in the United States, in that we are so excessively decentralised. We have decentralised so much, and we have so much authority in the subsidiaries that we can keep doing it for a long, long time, as long as it keeps working. I would say so far, our decentralisation has caused more benefits than defects, but nobody seems to copy us.
WB: That is absolutely true. But I would say this, decentralisation won’t work unless you have the right kind of culture accompanying it.
CM: But we do, and Greg will keep the culture.
You have espoused for decades the philosophy of buy and hold or hold forever. Has this philosophy changed as there seems to be much greater turnover in the equity portfolio lately?
WB: I don’t think there’s that much turnover.
CM: There is way too much.
WB: I would agree with that. The truth is our businesses are equities, so we own $400 billion or $500 billion, maybe more, in businesses. We don’t turn them over at all, we do not resell businesses. Well, we won’t even get into that, what we could do but we don’t do it. And we do relatively little, but as Charlie says we would do better if I had done less.