You have maybe heard of the shareholder question-and-answer sessions Berkshire Hathaway Chairman and CEO Warren Buffett holds with the man he describes as his partner, Vice Chairman Charlie Munger.
It was the highlight of last weekend’s annual meeting, as it has been for years, and I watched from section 222 in the upper deck of the CHI Health Center arena in downtown Omaha.
It’s an NHL-style arena so big it must be a little difficult from the top row to follow the movement of a puck. So imagine looking down from way up there at two elderly men — Buffett is 88 and Munger is 95 — responding to question after question, hour after hour, while seated at a small table
There’s nothing normal about that, as the guys up on stage seemed to acknowledge on Saturday.
“One of the reasons we have trouble with these questions is because … Berkshire is so very peculiar,” Munger said, responding to perennial shareholder curiosity about plans for who might next take over a company now led by an 88-year-old and why it’s just the two of them up on the stage.
“We have a different kind of unbureaucratic way of making decisions,” Munger continued. “There aren’t any people in the headquarters. We don’t have endless committees deliberating forever and making bad decisions. We’re radically different, and it’s awkward being so different. But I don’t want to be like everybody else because this has worked better. So I think you’re just going to have to endure us.”
If anything, Munger’s choice of word, “peculiar,” understates it. Normal companies don’t make $10 billion commitments over a weekend or agree to take the risk that somebody might win $1 billion for filling out a perfect bracket for the NCAA men’s basketball tournament.
As of the last quarter, Berkshire had more than $110 billion in cash and U.S. Treasury bills while its accumulated profits approach $350 billion. Yet no dividend has been paid since 1967.
It’s an old-fashioned conglomerate of a type that went out of fashion a long time ago, swept away by an emerging management principle that what’s best is focusing on your core business. By now it might be easier to list business segments Berkshire hasn’t invested in.
If anything’s a core business at the modern Berkshire it might be insurance, but even here Buffett’s approach is far from common.
If Berkshire collects more in premiums than it pays in claims and operating expenses, a so-called underwriting profit, that’s great. But Buffett really likes what’s called the float, the money that’s been collected as premium and then held until it gets paid in claims.
Conventional insurance companies don’t like taking risk with float because they know it’s going to be needed eventually. But Buffett has used Berkshire’s float, lately about $125 billion, to make savvy investments in stocks.
All of which raises the question of why so many people, including the group of Minnesotans who invited me to tag along this year, give up a spring weekend for the annual trek to Omaha. How can any of the lessons be easily applied? Normal company CEOs can’t stay in charge past their 88th birthdays or invest billions of dollars of insurance float in stocks. And Buffett doesn’t make claims for any secret recipe at Berkshire anyway.
That might make Berkshire shareholders in Omaha seem like baby boomers flocking to see their favorite band from high school, 45 years past its last hit. But let’s hand it to the writer who first observed that the Berkshire shareholders are really more like the faithful crowding into the cathedral for Easter morning services. It’s all stuff they have heard before. But hearing it again, directly from the bishop, helps them keep the faith.
On Saturday Buffet once again touched on favorite themes, like the importance of remaining open to good opportunities as they arise, understanding that they don’t come along often.
Buffett riffed on the problems of private equity, including being pitched funds when he didn’t think the returns had been calculated in an “honest” way.
The structure of a private-equity fund bugged him, too, how the manager makes money from fees even if proved to be what he called “the dumbest investor in the world,” while the people who put up the money take all the risk.
Buffett also did a masterful job of explaining how Berkshire decides when to buy back company shares. His hope is that the remaining shareholders are a little better off the day after a share repurchase.
He explained it like a parable, of three partners who each owned a $1 million stake in a partnership and one wanted out. If the remaining partners buy that one-third stake for $1 million, they are not any better off. So why do it? At a price of $900,000, though, the remaining two partners would each get a bump in their share of value.
Buffett seems baffled by the corporate practice of announcing buybacks with a specific dollar amount, like buying at any price is fine so long as the board authorized it. As he pointed out Saturday, “you can turn any investment into a bad deal by paying too much.”
This year’s all-day session wrapped up with another favorite topic, as a shareholder asked why See’s Candies hasn’t grown to become a dominant player outside of its traditional base of stores in the western United States.
See’s Candies might be one of Buffett’s best stories, a turning point for Buffett and Berkshire. In the early 1970s Munger had convinced him to buy this good business rather than just do more of what Buffett sometimes calls cigar-butt investing, buying beaten-down assets only because they were cheap.
As Buffett explained again Saturday, they repeatedly tried to grow California-based See’s. That proved to be a lot harder than it looked. And they learned along the way that pushing a great business beyond its profitable niche just costs money. So why not instead invest the profits into something better?
As Munger put it, “think of all the people you know that have tried to take one extra step and have fallen off a cliff.”
“Well, on that happy note,” Buffett said, his voice brightening, “we will conclude the meeting.”