The Berkshire meeting was last weekend and I thought I’d share a few highlights. But before I begin, this years meeting was a little dry on content.
There’s always some repetition across past meetings but this year, similar questions were asked several times. I counted three questions about buybacks and, at least, two about circle of competence. And there more Berkshire specific questions than usual (a good thing for shareholders).
If you missed the meeting, CNBC has video and transcripts of it in its entirety (links below).
The real thing is to buy stock — repurchase shares — only when you think you’re doing it at a price where the remaining shareholders have had — are worth more the moment after you repurchased it than they were the moment before.
It’s very much like if you were running a partnership and you had three partners in it and the business was worth 3 million, and one of the partners came and said, “I’d like you to buy back my share of the partnership for…$1.1 million?” And we said, “Forget it.” And if he said, “1 million?” we’d probably say, “Forget it,”…and if he said, “900,000,” we’d take it because, at that point, the remaining business would be worth 2-million-1, and we’d have two owners, and our interest in value would have gone from a million to a million and fifty-thousand.
So, it’s very simple arithmetic. Most companies adopt repurchase programs and they just say, “We’re going to spend so much.” That’s like saying, you know, “We’re going to buy XYZ stock, and we’re going to spend so much here.” “We’re going to buy a company.” “We’re going to spend whatever it takes.” — Buffett
With all the rhetoric around buybacks, I thought I’d leave this here. It’s the only thing about buybacks that matters. Is the company — the remaining shareholders — paying a good price for the stock or not?
On Munger’s Mistake
I bought a few shares of Belridge Oil, which went up 30 times rather quickly. But I turned down five times as much as I bought. It was the dumbest decision of my whole life. So, if any of you have made any dumb decisions, look up here and feel good about yourselves. — Munger
You can add this to the list of Munger’s mistakes of omission — things he should have done but failed to do for one reason or another.
Here’s the thing. Everyone does it. Limit it as much as humanly possible, learn from it if you can, and move on. Don’t waste time regretting the decision.
On “Value Investing”
The idea that value is somehow connected to book value or low price/earnings ratios or anything — as Charlie has said, all investing is value investing. I mean, you’re putting out some money now to get more later on. And you’re making a calculation as to the probabilities of getting that money and when you’ll get it and what interest rates will be in between.
And all the same calculation goes into it, whether you’re buying some bank at 70 percent of book value, or you’re buying Amazon at some very high multiple of reported earnings. — Buffett
Buffett’s comment came from criticism of Berkshire buying Amazon because it didn’t fit within the questioner’s notion of a “value” stock (I have no opinion on Amazon stock). The issue here is probably due to confusing a strategy with the philosophy (and probably taking Buffett’s prior view on tech too literally).
The confusion is nothing new. The “value is dead” or “value is broken” claims pop up every decade or so. Just because value funds (that tilt to P/B) underperform growth funds for an extended period does not mean that the value philosophy no longer works.
It makes for pointless headlines. Unfortunately, some people fall for pointless headlines. Then they sell their value funds. The people who understand the difference — and aren’t swayed by stupid headlines — end up making a lot of money.
On Advice to New Money Managers
I sold securities for a while, but in May of 1956, I had a number of members of my family… and they wanted me to help them out with stocks as I had earlier before I’d taken a job in New York. And I said, I did not want to get in the stock sales business, but I…was glad to figure out a way to do it, which I did through a partnership form…
But I said, “Here are the ground rules as to what I think I can do and how I want to be judged, and if you’re in sync with me, I want to manage your money, because I won’t worry about the fact that you will panic if the market goes down or somebody tells you to do something different. So, we have to be on the same page.”
“And if we’re on the same page, then I’m not worried about managing your money. And if we aren’t on the same page, I don’t want to manage your money, because you may be disappointed when I think that things are even better to be investing and so on.”
…And so, it’s enormously important that you don’t take people that have expectations of you that you can’t meet. And that means you turn down a lot of people. — Buffett
This is probably the single best advice any advisor or manager can get.
On Circle of Competence
I’d try and learn as much as I could about as many businesses, and I would try to figure out which ones I really had some important knowledge and understanding that was probably different than, overwhelmingly, most of my competitors.
And I would also try and figure out which ones I didn’t understand, and I would focus on having as big a circle as I could have, and also focus on being as realistic as I could about where the perimeters of my circle of competence were…
But if you know even one thing very well, it’ll give you an edge at some point. You know, it’s what Tom Watson Sr. said at IBM, you know. “I’m no genius, but I’m smart in spots and I stay around those spots.” And that’s basically what Charlie and I try and do. And I think that’s probably what you can do. — Buffett
But don’t try to force it.
Buffett: …you should expand your circle of competence —
Munger: If you can.
Buffett: If you can. Yeah.
And I’ve expanded mine a little bit over time. But —
Munger: If you can’t — I’d be pretty cautious.
Buffett: Yeah. You can’t force it. You know. If you told me that I had to, you know, become an expert on physics or, you know —
Munger: Dance, maybe, the lead in a ballet, Warren. That would be a sight.
Buffett: Yeah, well. That’s one I hadn’t really —
Munger: (Inaudible) now.
Buffett: That’s one you may be thinking about, but I — it hadn’t even occurred to me.
But, it’s ridiculous. That doesn’t mean you can’t expand it at all. I mean, I did learn about some things as I’ve gone along in a few businesses.
In some cases, I’ve learned that I’m incompetent, which is actually a plus, then you’ve discarded that one.
The benefit of continuous learning — hopefully — is recognizing what you’re good at and not good at. The best thing that can happen is figuring out what you’re terrible at (never will be good at), so you can spend your energy on improving in other areas.
The secondary benefit: It should make decisions easier — by quickly getting to “No” and walking away from things you don’t understand — as Buffett explains below.
On Evaluating Risk and Reward
We don’t have any formula that evaluates risk, but we certainly make our own calculation of risk versus reward in every transaction we do…
The main thing is you have — are you reasonably sure that you know what you’re doing? And if it gets past that hurdle, then we go on to figure out the math of gain versus loss and how much loss we can afford to take in anything. And we’re willing to take what sounds like large losses if we think that the rewards are more likely and proportional. — Bufett
How many people fail to stop when “No” is the answer to the first hurdle? Investing is rife with people who will put money into things they’re basically clueless about.
Much of this is comes back to circle of competence and sticking within areas you understand. Buffett describes the sensible way to approach investing but it requires the ability to walk away from investments that might look great but knowing they look great because you don’t completely understand it.
- I’ve got a willingness to lose a lot of money. — Buffett
- I’m a specialist in delayed gratification. I’ve had a lot of time to delay it. — Munger
- I think there’s a lot to be said for doing things that bring you and your family enjoyment, rather than trying to save every dime. — Buffett
- Figure out what works, and do it. — Munger
- It’s so much easier to take the good ideas and push them to wretched excess. — Munger
- No idea is good at any price. — Buffett
- I’ve been very, very, very lucky in life, in being able to control my own time to an extreme degree. — Buffett
- We don’t want to try and win at a game we don’t understand. — Buffett
- I’d settle for second place in a lot of the businesses. — Buffett
- I think the right strategy, for the great mass of humanity, is to specialize. Nobody wants to go to a doctor that’s half-proctologist and half-dentist. — Munger
- Large amounts of money, they develop their own anchors. — Munger
- I recommend that you look for somebody better than you are and then try to be like they are. — Buffett
BRK Annual Meeting Morning Session
BRK Annual Meeting Afternoon Session
Notes from the 2018 Berkshire Meeting
Notes from the 2017 Berkshire Meeting