The Q&A session at the Berkshire Annual Meeting can be hit or miss. A lot of questions get repeated year after year. The answers don’t really change much either. About half the time a good question gets asked or an old question finally gets a great answer.
Now that the meeting is streamed online, getting through it and taking notes is much easier. I watched the replay to this year’s meeting. I actually watched it twice. The first time at a faster speed just to get through it (the Q&A was 5 hours long), noting the timestamp for the better questions and answers. Then I watch those sections over again.
The notes below are from those topics I found most interesting.
On learning from failures and successes.
Every year someone asks about the type of business Buffett is looking to buy. He’s looking for a larger company similar to See’s Candies: a competitive advantage with great management at a good price. That hasn’t changed in decades.
But it was the early mistakes of buying poor businesses with little competitive advantage and so-so management that led them to that point.
We were very lucky early. The habit of buying horrible businesses that were really cheap, gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. That early experience was so horrible – fixing the unfixable – that we were very good at avoiding it thereafter. So I would argue our early stupidity helped us… But you have to try it for a long time and fail and have your nose rubbed in it to really understand it. – Munger
I really think, if you really want to be a good evaluator of businesses, an investor, you really ought to figure out a way – without too much personal damage – to run a lousy business for awhile. I think you can learn a whole lot more about business by actually struggling with a terrible business for a couple of years, than you learn by getting into a very good one where the business itself is so good that you can’t mess it up… It was a big part of our learning experience. – Buffett
The idea of learning from others is a great way to accelerate the learning curve. That said, some things don’t really make sense or sink in until you experience it a few times. Failing sets you up for later success. Starting early gives you time to learn and change course.
Charlie says See’s Candies was his biggest learning experience. The great brand and pricing power gave them access to a steadily increasing cash flow to reinvest in other businesses. It changed the way they looked at companies like Coca-Cola. But none of that would have happened if they didn’t learn the right lessons from See’s Candies.
I think a life properly lived is just learn, learn, learn all the time. I think Berkshire’s gained enormously from these investment decisions by learning through a long, long period. Every time you appoint a new person that’s never had big capital allocation experience, it’s like rolling the dice. We’re way better off having done it so long. But the decisions blend and the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn’t even be here. You’d be alive probably, but not here. – Munger
On technology and tech companies.
They avoided tech stocks early on because they didn’t have any advantage at the time. Since then, Buffett has changed his mind on tech. Charlie says it shows that Warren is still learning.
I think it’s a very good sign you bought the Apple. It shows either one of two things: either you’ve gone crazy or you’re learning. I prefer the learning explanation. – Munger
Buffett admits he was wrong about IBM so far (says he might be making two mistakes on IBM). He understands Apple better because he understands consumer behavior better.
The five largest companies in the U.S. by market cap are tech companies: Apple, Google (Alphabet), Microsoft, Amazon, and Facebook (BRK is neck in neck with Facebook). It shows the extreme advantages tech companies have. Tech requires a lot less capital to run and grow than the capital intensive companies of the past. Buffett thinks this trend is far from over.
Another point was made on the huge shift in retail toward online. Retail is changing in a big way and nobody is insulated from it. Buffett had this to say about the evolution of retail (emphasis mine):
If you go back 100 years to the great department stores, what did they offer? They offered incredible selection. If you had a big department store in Omaha, you had the 1,000 bridal dresses. And if you lived in a small town, the local guy had two or something of the sort. So the department store was the big exciting experience of variety at decent prices and convenient transportation because people took the street cars to get there. Then along came the shopping center and they took what was vertical before and they made it horizontal. They changed it into multiple ownerships but still kept incredible variety and assortments and convenience of going to one place and accessible transportation because now the car was the method. And then we went through the discount stores and all that.
But now you got the internet and you’ve got the ultimate in terms of assortments, you’ve got people coming in at low prices, and the transportation is taken care of entirely. So the evolution that has taken place, the department store is online now, basically, except much expanded in assortment, much more convenient, and lower prices. The world is evolved and it’s going to keep evolving, but the speed has increased dramatically. – Buffett
Artificial Intelligence was the other area mentioned. Buffett has no insight on it but does believe it will have a big impact, just not right away. He’s thinking decades.
Buffett talked about the hypothetical extreme case in A.I. If one person can push a button and do the work of everyone, the impact that has on governments, jobs, people, productivity, etc. is enormous. That probably doesn’t look good to a lot of people which is why it creates so much uncertainty and fear.
Munger compares it to the period after World War II when invention and progress moved along at smaller steady increments. People ultimately liked and adjusted to it. He also doesn’t think it will happen nearly as fast as many people think.
On opportunity cost.
Opportunity cost is a recurring theme. Their worst mistake in tech was not figuring out Google. They were an early customer through GEICO’s advertising on the search engine. Buffett had plenty of chances to ask questions and learning about it. He even talked to them early on in their IPO process.
Charlie thinks they were smart enough to figure it out, but failed. They will continue to make similar mistakes. They also cite Amazon and Wal-Mart as big missed opportunities.
Luckily, we don’t miss everything Warren. That’s our secret. We don’t miss em all. – Munger
On Jeff Bezos.
Bezos created two highly successful businesses in two different industries – retail and cloud. Buffett can’t think of anyone who has done it before at that level, especially with the amount of competition in both spaces. Buffett says it was a brilliance in execution.
Jeff Bezos is a different species. – Munger
I think Amazon’s experience in online retail – running servers around the world – uniquely positioned it for the move into its web services business. Google was too due to the global reach of its search engine.
On Buffett and Munger’s big advantage.
I think we have one other advantage. A lot of other people are trying to be brilliant and we’re just trying to stay rational. And it’s a big advantage. Trying to be brilliant is dangerous, particularly when you’re gambling. – Munger
Buffett references Keynes’s General Theory (chapter 12) as a great source on why investors are drawn to speculating in markets. There is always some level speculation. The point to watch for is when speculation runs wild.
There is nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks… And people succomb to it… Markets have a casino characteristic that has a lot of appeal to people, particularly when the see, like I say, people getting rich around them. And those who haven’t been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation… It will offer the investor more opportunities, actually, if they can keep their wits about them… Fear spreads like you can not believe until you’ve seen a few examples of it…
People like action and they like to gamble. If they think there’s easy money to be made, you’ll get a rush to it. For awhile, it will be self-fulfilling and create new converts, until the day of reckoning comes. – Buffett
Charlie calls it social proof. When it appears to work, more people do it. Avoiding that envy and fear (FOMO) on the way up and panic on the way down is the goal.
On job productivity, progress, and innovation.
Questions around jobs came up a few times during the meeting. The gist of the responses was capitalism always moves towards improved productivity and efficiency.
Unfortunately, that happens to be job destroying. Innovation in productivity allows fewer people to do more work. This has been going on since the industrial revolution. At the same time, progress and innovation, outside of productivity, are job creating.
Milton Freidman, I think it was, used to talk about the time – probably apocryphal – he would talk about the huge construction project in some communist country. They had thousands and thousands and thousands of workers out there with shovels, digging away on this major project. Then they had a few of these big earth moving machines behind, which were idol, which could have done the work in 1/20th of the time of the workers. So the economist suggested to the local party worker, whoever it was, “Why in the world didn’t they use these machines to get the job done in 1/10th or 1/20th the time instead of having all these workers out there with shovels?” And the guy replied, “Well, yeah but that would put the workers out of work.” Then Friedman said, “Then why don’t you give them spoons to do it instead.” – Buffett
The painful side of progress always overshadows the creative side. That will never change. But living in a capitalist system means embracing progress even though it could cost you your job because the alternatives are stagnation or move backwards.
We see it in the current political climate. Unfortunately, progress can hurt but it’s necessary.
I’m afraid that a capitalist system is always going to hurt some people as it modifies and improves. There’s no way to avoid it. – Munger
On Munger’s memory of an early Berkshire meeting.
My first memory when Warren got on this subject and they asked him, “What he wanted said at his funeral?” He said, “I want them all to be saying, ‘That’s the oldest looking corpse I ever saw.'” – Munger
- We’ve gotten a lot of credit for being smarter than we were. – Munger
- We learned we could not make a silk purse out of a sow’s ear. So we went around looking for silk. – Buffett
- There’s nothing like the pain of being in a lousy business to make you appreciate a good one. – Buffett
- The first rule of fishing is to fish where the fish are. The second rule of fishing is to never forget the first rule. There are too many other boats in the damn water, but the fish are still there. – Munger
- Execution is what counts. – Buffett
- People are always looking for a formula. And there is an ultimate formula but the trouble is you don’t know what to stick in for the variables. – Buffett
- I don’t know who said it but somebody said, “The problem is not in getting the new ideas but in shedding the old ones.” – Buffett
Lessons from the 2016 Berkshire Letter
Charlie Munger on Handling Mistakes