Once again, Berkshire Hathaway’s Annual Meeting was a showcase for the best of corporate America featuring the guru of value investing, 81-year-old Warren Buffett, and his long-time partner and alter ego, 88-year-old Charlie Munger. Five hours of answering questions from shareholders, financial analysts, and journalists, and they didn’t miss a beat.
Management succession was again a major topic of discussion, but in spite of Buffett’s recent announcement of prostate cancer, the topic did not seem to be the same level of concern as previously. Buffett said that he “feels good,” he does not require hospitalization, he is undergoing very successful treatment, and he expects to live many more productive years. Berkshire’s board has designated a CEO successor who was described at the meeting as an existing Berkshire executive immersed in the company’s value investment culture. As with Buffett, the new CEO would also be Chief Risk Officer who will continue to avoid excess leverage and insurance risk. Could it be Ajit Jain who has been with Berkshire since the 1980s and is in charge of Berkshire’s own highly successful reinsurance business? If so, we would applaud his choice. Buffett praised Jain’s ability to create value and manage risk.
Future designated Co-Chief Investment Officers Todd Combs and Ted Weschler were reported to be performing well with assets under their management increased by $1 billion to $2.75 billion each. Emphasis was also placed on the quality of Berkshire’s outstanding subsidiary CEOs, who run their companies independently.
Concern about the US economy was much less than that expressed in annual meetings of the last few years. US banks were described as now being “in fine shape” with most of their “abnormal losses taken,” their capital “buttressed,” and their liquidity “built.” The Federal Reserve and Treasury Department were given high marks for their actions which benefitted the banks’ recovery. Problems still needing to be addressed include the ongoing excessive US government fiscal deficits and the high US unemployment rate. Buffett said that the deficit could be contained by reducing expenditures to 21% of GDP and increasing revenues to 19% for a 2% differential as opposed to the current 8.5%. Munger estimated the future US long-term real economic growth rate (above inflation) at 1% annually, which would increase the income of each succeeding generation by 25%, although income distribution between the wealthy and the poor could pose a problem.
Less confidence was expressed for Europe. The European Central Bank’s support of the European banking system by providing one trillion euros of liquidity has kept the European banks in business, but successful resolution of the 17 member European Union’s sovereign debt crisis will be difficult to achieve politically.
Most of the annual meeting was spent discussing Berkshire’s operating subsidiaries and their future. Buffett considers Berkshire’s stock significantly undervalued, and so do we. Historically, Berkshire Hathaway has traded in the range of 1.5–1.7 times book value, which we think more accurately reflects its true value. Buffett renewed last year’s pledge that the company would repurchase its shares should their price fall to 110% of book value and further said Berkshire would be willing to purchase “tens of billions of dollars” of Berkshire stock at that level. On the subject of dividends, Buffett believes that he can reinvest earnings for greater value to shareholders, so there will be no dividends forthcoming from Berkshire.
Buffett said that Berkshire’s major operating subsidiaries are performing extremely well. GEICO’s share of the automobile insurance market has increased from 2% in the 1990s to 10% today, and he projects continued growth in underwriting profits and reserves available for investment. As a regulated electric utility, MidAmerican Energy has significant opportunity for profitable additional investment. So does railroad Burlington Northern Santa Fe, whose transport of one ton for 500 miles requires only one gallon of diesel fuel. While MidAmerican and Burlington Northern are in capital intensive industries, Berkshire is “happy with their 12% return on equity” for new investment. Altogether, Berkshire owns 79 operating companies plus many investments in publically held enterprises, the five largest of which are The Coca-Cola Company, International Business Machines Corp., Wells Fargo & Company, American Express Company, and The Procter & Gamble Company.
In response to a question, here’s a list of investment don’ts from Buffett and Munger:
- Stay away from companies you don’t understand and can’t forecast long term;
- Avoid highly priced stocks and look for those selling at less than intrinsic value;
- Stay away from initial public offerings (seller has too great a timing advantage);
- Avoid big disasters.
Sounds simple, but the trick is to execute like Warren Buffett.