May 6, 2019

The first weekend in May is always a time of the year we look forward to.  For starters, the weather is starting to turn for those in the Midwest and flowers are starting to bloom. It also marks the annual meeting in Omaha of Berkshire shareholders.  Often referred to as the Woodstock for Capitalists, the Berkshire annual meeting is like no other in that it attracts tens of thousands of people and provides a full day of insight and commentary from two of the most successful investors in history, Warren Buffett and Charlie Munger.  Takeaways from this years meeting including the following:

Current Stock Market Levels:

Given that Buffett is famous for saying, “I’ll give you the time or the price, but never both,” he didn’t say whether he felt the markets were over or undervalued.  He simply observed that the markets are incredibly cheap if you believe that 30 year rates are going to remain at 3% forever. Buffett said he doesn’t know when rates will rise, but he believes they will and the conditions that persist presently in the market and economy (ie. low rates, low inflation, budget deficits) are not sustainable long term.   

Tech Investing & Value Investing Principles:

Prior to the meeting, it was highly publicized that Berkshire Hathaway had made a purchase in shares of Amazon.  Buffett noted that the purchases were not by him, but rather Todd or Ted (Todd Combs and Ted Weschler-Berkshire’s other investment managers).  When quizzed about the purchases and whether shareholders should expect a change in positioning of the Berkshire investment portfolio going forward towards more growth orientated names, Buffett said that the Amazon investment should not be looked at as a growth or value stock, but that all intelligent investing is value investing.  He added that all investing done at Berkshire is still done through the value investing lense and that the other managers (Todd and Ted) have different competencies than Buffett or Munger, but the considerations are the same for investing in Amazon as it would be for investing in something like Bank of America. “A bird in the hand is worth two in the bush” always said Buffett. 

Opportunities in Europe:

Buffet provided a rare interview in the Financial Times last week and he suggested a reason for doing the interview was to raise the awareness of European business owners so they know that Berkshire can be a great home for them.  He said he would get on a plane tomorrow to do a deal of significant size in Europe if the sellers were serious.

Bitcoin:

Bitcoin reminds Buffett of his honeymoon to Las Vegas.  He was amazed at all of the people flooding into the casinos knowingly betting money on games that they were statistically certain to lose; he feels Bitcoin will have the same outcome.  Buffett called Bitcoin a speculative “gambling device” where there has been a lot of fraud in the space.

Private Equity:

Buffett and Munger both bemoaned the fact they often get outbid for deals by the private equity guys that are using cheap borrowed money to drive up prices.  Buffett said that Berkshire could enhance returns if they were willing to employ more leverage, but he won’t do it if it means jeopardizing the financial strength of Berkshire.  He had a warning for the pension funds that are piling into private equity in an effort to meet their required returns saying, “if I were running a pension fund, I would be very careful about what is being offered to me.”

Environmental,Social, and Governance (ESG):

In a question that asked how Berkshire would score on ESG factors, Buffett and Munger think that the company overall would score highly.  They went on to say that they do not participate in formal ESG scoring and trust their managers to make decisions based on what is right. Buffett said they are focused on not getting caught up in unnecessary corporate reporting and bureaucracy that most corporations feel are necessary.  He also discussed how a vast majority of “independent” board directors are not necessarily independent and merely go along with what the CEO wants to do so they can collect their $250k salary.

Stock Repurchases:

The topic of share repurchases was one of the most asked about topics during the day.  Given the cash hoard at Berkshire (currently in excess of $110 billion), investors were anxious to hear what Buffett and Munger had in store for the sizeable cash position at Berkshire.  Buffett has changed his views of repurchasing when the price to book value ratio is cheap (Berkshire in the past had a stated repurchase criteria of 1.3 times price to book value which has since been removed).  He now repurchases when the share price is below his conservative estimate of intrinsic value. Berkshire bought over $1B in the first quarter, but Buffett says he is “not salivating to repurchase” at these valuations.  He went on to say that they could buy a significant amount of shares (up to $100B) if the market landscape warranted and that a majority of repurchases will be done in the B Class shares due to higher volume. Charlie says they will be more liberal with repurchases in the coming years.

Berkshire’s Long-term Strength:

Buffet said he manages the company as if shareholders have 100% of their net worth in Berkshire (he noted that  many shareholders do). As a result, Berkshire stock will likely underperform in strong market up years, but should provide protection and safety in down years.  As far as the long term perspective, the energy, industrials and insurance businesses are amongst the best (if not the best) positioned as any competitor in the world.  Buffett believes there are advantages to having everything within Berkshire under one umbrella and he is confident the model will prove itself over time. As proof of that belief, Buffett has included a clause in his trust so the trustee will hold 100% Berkshire stock rather than the traditional dynamic wherein trustees diversify trust assets. 

Summary:

At a time when the distractions and noise around the world are at an all time high, the Berkshire annual meeting is like a giant spray of windex to help clean some of the gunk out.  Buffett and Munger have created a once in a lifetime masterpiece with Berkshire, teaching thousands invaluable investment and life lessons along the way. Like Fairfax which we provided an update about a few weeks ago, Berkshire’s shares are  not likely to keep pace in a roaring bull market. However, as we get late in what is a historical run for both the economy and the stock market, cash will be king again some day and few are better at capitalizing on opportunity like Berkshire.  

The information contained in this missive represents Boyle Capital Management, LLCs (dba Boyle Capital) opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, Boyle Capital has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Boyle Capital within the past twelve-month period is available upon request.

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