Far from the bustle of Wall Street, some of the worlds finest minds in finance gather. It was the first weekend of May, and I was lucky enough to be among the 40,000 that made the Pilgrimage to Omaha Nebraska. During this time the population of Omaha swells for the annual Berkshire Hathaway meeting. This year was quite special being the 50th anniversary.
The multi day event starts on Friday where the CenturyLink Center is filled with products from the Berkshire portfolio; See’s Candies, Mini DQ Blizzards, Justins Cowboy boots, and even a full model house from Clayton Homes. Saturday is the main event where Warren Buffett and investment partner Charlie Munger sit and respond to any questions for 6 straight hours, except for a quick lunch break.
To put that in context two men aged 85 (Buffet) and 91 (Munger) sit in front of the packed CenturyLink and field questions from top analysts, shareholders, and journalists regarding the past , present, and future.
Berkshire Hathaway was originally a textile mill in which Warren Buffett started purchasing shares in 1962 and took a controlling interest in 1964. In the late 60’s Buffett started to focus on the insurance industry, and as the saying goes – The rest is History.
Berkshire now has a 327 Billion market cap…
When looking back on the long standing partnership, they were asked with the benefit of hindsight, what would they do differently.
Buffett: We could have gone harder and pushed further, especially early on. Main reason for our conservatism is that we had 100% of our net worth invested and large portions of our early investors net worth invested. This caused us to be more cautious than we probably should have been.
Munger: If we would have taken leverage like many of our competitors we would be a much larger company today, however we would have been up sweating at night over our positions.
As the Q&A started, Clayton Homes was the first company to be brought into question, and Mr. Buffett was prepared. So much so that he had to highlight to the audience that he does not receive any questions prior to the meeting, just that he knew it would come up. Berkshire came under fire in April due to an article published by the Seattle Times criticizing Clayton Homes of providing high interest loans to trap low income customers. Mr. Buffet went on to state that many don’t fully understand the mechanics of the loan industry, and that he was proud of Clayton’s practices which had default rates below industry competitors at roughly 3%. CNBC went on to ask the same question which Mr. Buffet answered with poise in the video below.
Looking Internally, multiple shareholders raised concerns of Berkshires partnership with 3G Capital. The partnership first started with the takeover of Heinz in 2013. They collaborated again for the 2014 merger of Burger King & Tim Hortins, and most recently that of Heinz & Kraft.
One share holder stated that “He could not make a moral case” for 3G’s strategy of cost cutting, most importantly lay-offs. Furthermore he stated that he didn’t believe it fit with the Berkshire model. Mr. Buffet acknowledged his concerns but highlighted that both 3G and Berkshire have similar goals – Efficient operations, increasing shareholder return, and long-term growth. In regards to lay-offs both Mr. Buffett and Mr. Munger agreed that they wouldn’t want any of the companies in the Berkshire portfolio to be ran with more people than necessary.
When asked about external factors, interest rates and the current economy were first and foremost. Buffet explained that they are ready to act on any kind of economic turbulence, while others wont be. He further stated that if opportunities arise over the next decade the firm will be prepared to make the appropriate decisions. This position of strength helped Berkshire profit during the Global Financial Crisis by providing liquidity to companies such as Goldman Sachs (GS) and General Electric (GE) during the credit crunch.
Buffett: During the last time of trouble, we were about the only party supplying health to the financial system. The problems of others can’t hurt us in any significant ways. We’re unique in the levels of safety built.
Looking to the future, a question brought by share holders was will Berkshire break up or spin off their companies? Mr. Buffett gave a resounding no, while highlighting two main reasons- synergies and taxes.
The synergies stem from the ability to transfer capital. With an investment horizon of “hold forever” many companies within the portfolio have hit their relative growth ceiling. This provides excess cash that would traditionally be returned to shareholders in the form of dividends, which Berkshire does not pay. However Berkshire funnels that excess cash into higher growth opportunities within the vast portfolio. All of this is done under the same tax code, providing further benefits for shareholders, who would have to pay taxes to do this transaction outside of the Berkshire portfolio.
With their combined age of 176 succession plans were bound to come up. A member of the audience asks about the qualities of Ted Weschler and Todd Combs, the two prime candidates. Both Buffett and Munger went on to highlight that they are both extremely capable people, and that Berkshire will be in good hands when ever they do step down.
Buffett: “Both Ted and Todd are very, very smart about investments as well as business, they understand the reality of business operations and on top of that they have qualities of character which are terribly important to me and Charlie.”
There are concerns from many, that no matter how capable the successor, the firm will loose a key advantage once Buffett steps down. The key is Buffett’s reputation and position within the investing world. Deals highlighted earlier during the Global Financial Crisis would not have been possible with out Buffett at the helm. It’s his reputation that brought those deals to the table, not their cash reserves.
After the 6 hours of Q&A the event wraps up with the quick Vote on board members. I leave feeling honoured to have had the opportunity to attend, and hear the Oracle of Omaha speak. The future of Berkshire Hathaway is unclear. Only time will tell if Berkshire can recreate its past successes. What we do know is that who ever is picked to head Berkshire, has very large shoes to fill.