Outlook Business has been covering the Berkshire Hathaway Annual Meeting since 2013 for its readers. This year though, due to health and safety concerns around COVID-19, chairman and CEO Warren Buffett decided to keep the meeting low-key without shareholders and the media in attendance. The most notable absence though was of long-time partner and confidante Charlie Munger. As Buffett himself said in his opening remarks about the 2020 meeting, “It doesn’t look like an annual meeting. It doesn’t feel exactly like an annual meeting, and it particularly doesn’t feel like an annual meeting because my partner of 60 years, Charlie Munger, is not sitting up here.” Though potential successor and vice chairman Greg Abel was up on stage, the spotlight was clearly on the Oracle of Omaha. All through the Yahoo Finance Webcast, insights, wisecracks and confessions were aplenty as Buffett answered questions on low interest rates to exiting airline stocks. These excerpts might just have you nodding in agreement. For our earlier coverage on the Berkshire Hathaway Annual Meeting, you can log on to The Berkshire Special.
Why did Berkshire Hathaway sell its airline holdings entirely?
WB: We were not disappointed at all with the way the managements ran the businesses at American Airlines, Delta Airlines, Southwest Airlines, and United Continental. We like them but the world has changed for the airlines. I may be wrong and I hope I am wrong, but I think it has changed in a very major way, and the four companies are each going to borrow perhaps an average of at least $10 billion-12 billion each. You have to pay that back out of earnings over some period of time. In some cases they would have to sell stock or sell the right to buy a stock at these prices. And that takes away the upside.
I don’t know whether it’s two or three years from now that as many people will fly as many passenger miles as they did last year. They may and they may not, but the future is much less clear to me as to how the business will turn out. And of course the airline business has the problem that if the business comes back 70% or 80%, the aircraft don’t disappear. You have got too many planes, but it didn’t look that way when the orders were placed a few months ago. But the world changed for airlines and I wish them well. We put seven or eight billion dollars into it and we did not take out anything like seven or eight billion. We felt our share of the underlying earnings was a billion dollars and we felt that that number was more likely to go up than down over a period of time. That was my mistake; I am the one who made the decision.
Berkshire’s cash position has not gone down, why are you not comfortable buying now?
WB: When I look at worst case possibilities, I would say that there are things that I think are quite improbable and I hope they don’t happen, but that doesn’t mean they won’t happen. For example, in our insurance business, we could have the country’s number one hurricane that it’s ever had, but that doesn’t preclude the fact that we could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem, we prepare ourselves for problems that sometimes create their own momentum. I mean, in 2008 and 2009, you didn’t see all the problems the first day. What really kicked it off was when Freddie and Fannie, the GSEs went into conservatorship in early September and then when money market funds broke the buck. There are things to trip other things, and we take a very much worst-case scenario into mind that probably is a considerably worse case than most people do.
You shouldn’t buy stocks unless you are prepared financially and psychologically to hold them. You have got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it. There have been three times in Berkshire’s history when the price of Berkshire stock went down 50%. Now, if you held it on borrowed money, you could have been cleaned out. There wasn’t anything wrong with Berkshire when those three times occurred. But if you are going to look at the price of the stock and think that you have to act because it’s doing this or that, or somebody else tells you, “How can you stay with that,” when something else is going up. You’ve got to be in the right psychological position.
We have not done anything because we don’t see anything that attractive to do. Now, that could change, very quickly or it may not change. In 2008 and 2009, we weren’t buying things to make a statement to the world. We made them because they seemed intelligent things to do and markets were such that we didn’t really have much competition. My timing was actually terrible in 2008 or 2009, we would have been a lot better off if we had waited four or five months.
Will Berkshire act as a lender of last resort to its operating companies to ensure they survive the pandemic and win market share?
WB: For companies that need money, market share probably is not their number one problem. We are not going to send money indefinitely to anything where the future has changed dramatically from what it was a year or just six months ago. We made that decision in the airline business. We took money out even at a substantial loss, and we will not fund a company where we think that it’s going to chew up money in the future.
We started out with a company like that in our textile business at Berkshire Hathaway in 1965 and we went for 20 years trying to think we could solve something that wasn’t that solvable. We are not in the business of subsidizing any companies with shareholders money. There are a few industries where there’s a fair likelihood that our employment could be reduced, but they are not large. In some of our manufacturing businesses for example, if demand were dramatically reduced, we would have layoffs at some point.
What effect is COVID-19 having on Berkshire’s insurance businesses? Other insurance companies have reported losses from boosting reserves for future insurance claims that they expect to pay as a result of coronavirus.
WB: The amount of litigation that is going to be generated out of what’s already happened, let alone what may happen, is going to be huge. Now, just the cost of defending litigation is huge, enormous expense, depending on how much there is. In auto insurance, which is our number one field in terms of premium volume, that’s more definable, but who knows what comes out of it in terms of litigation. But in what they call commercial multiple peril, which involves property losses and where some people elect to buy business interruption experience coverage, many policies quite clearly in the contract language would not have a claim for business interruption under a commercial multiple peril policy. We are not big in the commercial, multiple peril business.
We’ll have litigation costs, but proportionally it’s not the same with us as with some other companies. There’s no question that some insurance companies will pay a lot of money relative to their size, in terms of policies that they’ve written. And I think we have reserved, and our history shows we generally have reserved on the conservative side, adequately at least. Managers at our insurance operations evaluate their losses and build in something for social inflation. They build in for all kinds of things. Generally speaking, Berkshire has been pretty accurate in its reserving. I have no reason to think that we’re otherwise than that, currently.
To what would you attribute Berkshire’s under-performance compared with the S&P 500 over the past five, ten or 15 years? Even year to date, Berkshire is trailing the S&P 500 by 8%.
WB: I recommend the S&P 500 to people. And I happen to believe that Berkshire is about as solid as any single investment can be, in terms of earning reasonable return over time. But, I would not want to bet my life on whether we beat the S&P 500 over the next 10 years. I obviously think there’s a reasonable chance of doing it, and we’ve had periods we’ve been doing it for.
I think that when you work with large funds, it gets tougher. It’s certainly gotten tougher for us, with larger funds. I would make no promise to anybody that we will do better than the S&P 500. But what I will promise them is that I’ve got 99% of my money in Berkshire. Most members of my family may not be quite that extreme, but they’re close to it. And I do care about what happens to Berkshire over the long period about as much as anybody could care about it. But caring doesn’t guarantee results; it does guarantee attention. It’s hard to imagine getting a terrible result with Berkshire but, anything could happen. What I do know is it would be easier to run $5 million than a book of $375 billion.
We can do things in insurance nobody else can do. That doesn’t mean much, at many times. But occasionally it may be important. So, there are some advantages to size and strength. But there are disadvantages to size, too. If we find some great opportunity for a billion dollars to double our money, that’s a billion pretax and that’s, $790 million after tax. And on a market value of $540 billion or whatever it may be, that doesn't amount to much, unfortunately. We’ll still try and do it if we can.
Is there a risk of permanent loss of capital in oil equity investments?
WB: Well, there certainly is, there’s no question. If oil stays at these prices, it’ll affect the banking industry to some degree. There’s a lot of money that’s been invested, which did not factor in $17 or $20 or $25 price for WTI. But you can do the same thing in copper. You can do the same thing in some of the things we manufacture. But with commodities it’s particularly dramatic and farmers have been getting lousy prices but to some extent the government subsidized them.
But if you’re an oil producer, you take your chances on future prices, unless you want to sell a lot of futures forward. Occidental actually did sell 300,000 barrels a day; they bought puts and sold calls to match it. They were protected for a layer of $10 a barrel on 300,000 barrels a day. But when you buy oil, you’re betting on oil prices over time, but there is risk and the risk is being realized by oil producers as we speak. If these prices prevail, there will be a lot of bad debts in energy loans. If there are bad debts, you can imagine what happens to the equity holders. So yes, there’s a risk.
Is Berkshire Hathaway susceptible to a break-up post Buffett, by activist investors?
WB: If you were to sell Berkshire’s various subsidiaries, you would incur a very significant amount of tax at the corporate level before anything was distributed to the shareholders. There are imaginative ways that people use to avoid taxes.
There’s enormous advantage in capital deployment within the place and there is not a big discount to break-up value embodied in Berkshire’s price. The situation actually is that although all my Berkshire shares will be given to charities pursuant to a plan I developed 14 years ago and followed ever since and will continue following this July, it still involves a big voting percentage that will still remain in the picture aside even from the Buffett family. So, a break-up isn’t going to happen.
Now, everybody in the world will come around and propose something and say it’s wonderful for shareholders and by the way, it involves huge fees. You do not get impartial advice from Wall Street when there’s enormous amount of fees possible for one action and no fees applicable from another action. But you can be sure I’ve thought about it and I would say that you can count on Berkshire’s present posture being continued for a long time. I can’t tell you what’s going to happen a hundred years from now and I can’t tell you exactly what would happen for example if certain ideas in terms of wealth taxes changed or taxes on foundations change. But my plan has been thought out and in place for a long time and it not only ensures that the money that’s been made, all of it ends up going to various philanthropies staggered over time, but it also will keep the wolves away.
If interest rates are negative, then insurance float is no longer a benefit but a liability. How will Berkshire’s insurance companies respond if interest rates became negative in the United States?
WB: If they are going to be negative for a long time, you better own equities or something other than debt. It’s remarkable what’s happened in the last 10 years. I’ve been wrong in thinking that you could really have the development you’ve had without inflation taking hold. We have $120-odd billion and a high percentage of that is in Treasury Bills, which are paying us virtually nothing. They’re a terrible investment over time, but when opportunity arises, they may be the only thing you can encash to pay for those opportunities. I mean, the rest of the world may have stopped. We also need them to protect, be sure that we can pay the liabilities we have in terms of policy holders over time. And we take that very seriously.
So if the world turns into a world where you can issue more and more money and have negative interest rates over time, I’d have to see it to believe it, but I’ve seen a little bit of it. I’ve been surprised, I’ve been wrong so far. If you’re going to have negative interest rates and pour out money and incur more and more debt relative to productive capacity, you’d think the world would have discovered it in the first couple thousand years rather than just coming on it now. It’s probably the most interesting question I’ve ever seen in economics, which is, can you keep doing what we’re doing now. The world’s been able to do it for a dozen years or so, but we may be facing a period where we are testing that hypothesis with a lot more force than we’ve tested before. I wish I knew the answer.
I’d love to be Secretary of the Treasury if I knew I could keep raising money at negative interest rates. That makes life pretty simple. We’re doing things that we really don’t know the ultimate outcome, but I don’t think they’re without consequences. Pushed far enough, I think there could be extreme consequences but there would be extreme consequences if we didn’t do it as well.
Given that the pandemic might put a lot of pressure on bank loans, what clues do you look for to decide whether a bank is run by a true banker who avoids doing dumb things?
WB: That’s a very good question, but I would say that the one thing that made Chairman Powell’s job a little easier this time than it was in 2008-09 is that the banks are in far better shape. So in terms of thinking about what was good for the economy, he was at the same time worrying about what he was going to do with Bank A or Bank B. The banks in 2008-09 did some things they shouldn’t have done and they were certainly in far different financial condition than now. But the banks need regulation. They benefit from the FDIC, but part of having the government standing behind your deposits is to behave well. I think that the banks have behaved very well, and are in very good shape. They built up their balance sheets and they are not presently part of Powell’s problem, whereas they were very much part of Bernanke’s problem back in 2008-09.
How you spot the people that are doing the dumb things is not easy. Well, sometimes it’s easy, but I don’t see a lot that bothers me, but banks are in the end institutions that operate with significant amounts of other people’s money, and if the problems become severe enough in an economy, even strong banks can be under a lot of stress.
I could think of possibilities, and Jamie Dimon referred to this a little bit in the JP Morgan report. You can dream of scenarios that put a lot of strain on banks, and they’re not totally impossible. I think overall the banking system is not going to be the problem. I wouldn’t say that with 100% certainty because there are certain possibilities that exist in this world where banks could have problems. They’re going to have problems with energy loans. They’re going to have problems with consumer credit. But they know it, and they’re well capitalized. They may need to build more reserves but they are not a primary worry of mine at all.
Why was there no repurchase of Berkshire shares in March when they dropped to a price that was 30% lower than the price that shares were repurchased for in January and February?
WB: It was very, very, very short period where they were 30% less. I don’t think Berkshire shares relative to present value are at a significantly different discount than they were when we were paying somewhat higher prices. It’s like Keynes or whoever it was who said, "When the facts change, I change my mind. What do you do, Sir?" We always think about it, but I don’t feel that it’s far more compelling to buy Berkshire shares now than I would’ve felt three months or six months or nine months ago. It’s always a possibility. We’ll see what happens.
There could be a price relative to value at that time. I mean, the value of certain things have decreased. Our airline position was a mistake. Berkshire is worth less today because I took that position than if I hadn’t. There are other decisions like that, and it is not more compelling to buy the shares now than it was when we were buying them. It’s not less compelling but the price has not gotten to a level where it really feels way better to us than other things, including the option value of money to step up in a big, big way.
Many people in the press and politics are questioning the validity of capitalism. What can you say to them that might prompt them to take a look at capitalism more favorably?
WB: The market system works wonders, and it’s also brutal if left entirely to itself. We wouldn’t be the country we are if the market system hadn’t been allowed to function. To some extent you can say that other countries around the world that have improved their way of life dramatically, to some extent have copied us. So the market system is marvelous in many respects. But it needs government, and in a way it is creative destruction. But for the ones who are destroyed, and for the people who work in these industries, it can be very brutal. So, I do not want to come up with anything different than capitalism, but I certainly do not want unfettered capitalism. I don’t think we’ll move away from it, but I think a lot of thought should be given to what would happen if we all drew straws again for particular market-based skills.
Somewhere way back, somebody invented television, I don’t know who it was. Then they invented cable, then pay systems and all of that. So a fellow that could bat 406 in 1941 was worth $20,000 a year and now a marginal big leaguer makes vastly greater sums because in effect, the stadium size has increased from 30 or 40 or 50,000 people to the country, and the market system, capitalism took over. It’s very uneven. The market system can work toward a winner-takes-all type situation, and we don’t want to discourage people from working hard and thinking hard but that alone doesn’t do it. There is a lot of randomness in the capitalist system, including inherited wealth. I think we can keep the best parts of our market system and capitalism, and we can do a better job of making sure that everybody participates in the prosperity that it produces.
You mentioned that Ben Graham is one of the three smartest people you have ever met. Can you name the other two?
WB: I may not be one of the smartest, but I’m smart enough not to name the other two, that would just make two people happy. Ben Graham is one of the three smartest people. I’ve known some really smart people. Smartness does not necessarily equate to wisdom either. Ben Graham, one of the things he said he liked to do every day was, he wanted to do something creative, something generous, and something foolish. He said he was pretty good at the latter. He was amazing, actually at the creative.
It’s interesting that IQ does not always translate into rationality and behavioral success or wisdom. I know some people that are extraordinarily wise that would not be in the top three on an IQ test. But if I wanted their judgment on some matter, even if I wanted to put them in a position of responsibility someplace, I might prefer them to, say one of the three. That’ll leave the other two feeling fine, of the three. We’ll see you next year, we’ll fill this place.