Victoria Harris and I recently attended the Berkshire Hathaway annual meeting in Omaha, Nebraska. Berkshire Hathaway is an amazing company, it has delivered its shareholders an average rate of return of 19.7% per annum for the last five decades. However the attraction of attending the Berkshire Hathaway annual meeting was to hear Warren Buffett, the Oracle of Omaha, and his right hand man Charlie Munger speak.
The event was an unforgettable experience. This year 40,000 shareholders and devoted fans from around the world made the trek to Buffett’s home town of Omaha, Nebraska. Queues built at 6am on a Saturday morning outside an indoor stadium in Omaha, in freezing rain, to await a 7am rush for seating. The main event was a five and a half hour question and answer session with the pair. The formal proceedings of the annual meeting lasted only 15 minutes.
Buffett and Munger defy their age at 85 and 92 respectively. With no knowledge of what would be asked prior, they tirelessly answered questions from a panel of journalists, financial analysts and the audience on a wide range of topics. The questions ranged from US politics to the price of oil and the ethics of Berkshire’s 10% holding in the Coca-Cola Company. Buffett and Munger delivered answers with a significant amount of philosophy on investment, economics, and life in general. Buffett is the showman while Munger tells it like it is. To remain focused throughout the meeting Buffett consumed several cans of Coca-Cola, “I’m about one quarter Coke” and Munger chewed on candy from See’s (another Berkshire company).
Buffett and Berkshire have achieved their success via a combination of “patience and opportunism”. Over the decades Buffett has built Berkshire into a conglomerate with a market capitalisation of approximately US$350bn based on a consistent approach to investing. This is over four times the market capitalisation of the New Zealand share market at around NZ$120bn. Upfront during the question and answer session Buffett addressed the audience: “Our goal at Berkshire is to increase the operating earnings every year… we buy businesses with a significant moat (competitive advantage), high quality management and make sure that management are highly incentivised to widen their moat”. Buffett places heavy emphasis on understanding the basic economics of the industry a company operates in to assess how defensive its position is. He also focuses on assessing whether a manager of a business he is contemplating buying will behave differently in the future once this manager has been paid handsomely for it. He believes that “the human quality is incredibly important.”
The fixed capital base of Berkshire Hathaway also offers significant advantage. This has enabled Buffett to take a long term view on investments and not be concerned by macro-economics, an advantage that has seen opportunistic purchases of new companies at weak points in the economic cycle. By contrast managed funds in New Zealand are offered under the PIE (Portfolio Investment Entity) structure. These funds have no fixed capital base and allow investors to withdraw capital at short notice. This limits the managers’ ability to make the similar long term investment decisions and take full advantage of the economic cycle.
Put bluntly by Munger his response to a question on the economic outlook, “micro-economics is business, macro-economics is what you put up with.”
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.