Warren Buffett held forth on airlines, buybacks, bailouts, coronavirus, the US economy, oil prices, and other topics at Berkshire Hathaway’s annual meeting on Saturday, often described as “Woodstock for capitalists.”
The famed investor and Berkshire CEO, along with Greg Abel, vice chairman of non-insurance operations, hosted the virtual event and answered several questions. The event was livestreamed by Yahoo Finance.
The pair spoke hours after Berkshire released its first-quarter earnings. The company posted a record quarterly net loss of about $50 billion, largely due to $55 billion in investment losses.
It also grew its cash pile from $128 billion to $137 billion in the period, and sold about $6.1 billion in stock on a net basis in April, upending expectations that it would capitalize on the coronavirus sell-off and buy stocks on the cheap.
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Here are the highlights from the Berkshire annual meeting:
“Charlie is in fine shape”
Buffett opened the meeting by lamenting the absence of Charlie Munger, Berkshire’s vice chairman and his longtime partner.
“Charlie is in fine shape, his mind is as good as ever, his voice is as strong as ever,” he said. It “just didn’t seem like a good idea” for the 96-year-old to fly from his California home to attend the meeting in Omaha, Nebraska.
“He’s added Zoom to his repertoire,” Buffett continued, referring to the video-conferencing app. “He’s just skipped right by me technologically. Like stepping over a peanut.”
“It’s been a flip of the switch”
Buffett discussed the impact of the coronavirus pandemic.
“It’s been a flip of the switch in a huge way in terms of national behavior, the national psyche, it’s dramatic,” he said.
“There was an extraordinarily wide variety of possibilities on both the health side and the economic side,” Buffett continued. A few months on, it’s become clear that “we’re not getting a best case and we know we’re not getting a worst case.”
“The range of possibilities is still extraordinarily wide,” Buffett continued. “We do not know what exactly happens when you shut down a substantial portion of your society.”
Whereas the US economy went off the tracks in the 2008 financial crisis, Buffett said, “This time we just pulled the train off the tracks and put it on its siding.”
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“Nothing can stop America”
Buffett offered historical context for the current disruption by reflecting on the Great Depression. He pointed out that someone who invested on the day of his birth in August 1930 needed to wait more than 20 years to make back their money.
He also discussed the challenges that his father faced at that time, when he had no job and two children to feed, but couldn’t access his savings as the bank was closed.
“Don’t worry about your groceries,” Buffett’s grandfather, who owned a grocery store where Buffett and Munger worked as children, told his father. “I’ll let your bill run.”
“He cared about his family, but he wasn’t going to go crazy,” Buffett joked.
When the Dow Jones passed the 381 mark in the 1950s, he said, investors feared the market was overheated and it was going to be 1929 again. Buffett’s mentor and boss at the time, Benjamin Graham, was called to Washington along with a slew of other experts to assess whether the US economy was in trouble.
Now, the Dow is above 24,000. “You’re looking at a market today that has produced $100 for every $1,” Buffett said. “Nothing can stop America when you get right down to it.”
“We are now a better country as well as an incredibly more wealthy country than we were in 1789,” the next slide read. “We have gone dramatically in the right direction,” Buffett said.
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“I hope I’ve convinced you to bet on America”
Buffett applied his optimistic outlook to the pandemic threat. He also underlined his company’s commitment to funding its own operations, and warned against the dangers of debt.
“When something like the current pandemic happens, it’s hard to factor that in and that’s why you never want to use borrowed money to buy into investments,” he said. “We run Berkshire that way.”
“There’s no reason to use borrowed money to participate in the American tailwind,” he added.
Buffett also trumpeted the merits of stocks.
Equities are an “enormously sound investment,” he said, that will outperform US Treasuries and the money people have stashed under their mattresses over time.
Buffett also discouraged people from selling stocks purely because their prices change.
“If you owned the businesses you liked prior to the virus arriving, it changed prices, but nobody’s forcing you to sell.”
The Berkshire boss recommended “the best thing” for investors to bet on is the S&P 500 index, as it gives them a broad cross-section of American businesses.
“I will bet on America the rest of my life,” Buffett said. “I hope I’ve convinced you to bet on America.”
“It hurts some of our businesses a lot”
Buffett described the impact of coronavirus on Berkshire’s numerous companies.
“For some period, certainly during the balance of the year … our operating earnings will be considerably less than if the virus hadn’t come along,” he said. “It hurts some of our businesses a lot.”
While Berkshire’s three biggest businesses — insurance, the BNSF railroad, and Berkshire Hathaway Energy — are in a “reasonably decent” position,” Buffett said, other businesses have been “effectively shut down.”
Buffett also defended the company’s vast cash reserves.
“We don’t want to be dependent on the kindness of friends even,” Buffett said, let alone strangers. “There are times when money almost stops,” he added, pointing to the 2008 financial crisis and the liquidity crunch just over a month ago.
“Investment-grade companies were essentially going to be frozen out of the market” in late March, Buffett said, before the Federal Reserve “reacted in a huge way.”
“Fear is the most contagious disease you can imagine, makes the virus look like a piker,” he added, using a term for a gambler who only makes small bets.
“I was wrong”
Buffett shed some light on Berkshire’s stock-market activity in recent months. “We did very little in the first quarter,” he said.
However, he pointed to Berkshire’s sales of $6.1 billion in stocks on a net basis in April, and explained that figure reflected its exit from positions in the “big four” US airlines.
“It turned out I was wrong,” Buffett said about his bets on American, Delta, United, and Southwest. He explained that the airline business has “changed in a very major way.”
The investor questioned whether people would fly as much in the next two or three years as they did last year. Even if 70% or 80% of the airline business returns, he said, the carriers could end up with “too many planes.”
Later, he added that an oversupply of airline seats would drive down prices, and it was unclear how long the airlines would have to sustain billions of dollars in operating losses due to the pandemic.
Moreover, they will have to repay their recent loans from the government out of their earnings, he said. The carriers also agreed to hand over warrants that the Treasury can exercise to buy their shares at a discount in the future then sell them for a profit, potentially weighing on their stock prices down the line.
“The future is much less clear to me,” Buffett said about the airline business.
Buffett addressed the question of whether Berkshire would be bailing out companies as it did during the financial crisis. He said that the Fed’s speed in lending to struggling companies meant there was less need for Berkshire’s cash this time around, and the right opportunity was yet to come its way.
“We haven’t done anything because we don’t see anything that attractive to do,” Buffett said. However, there was some early interest, he added.
“There was a period right before the Fed acted,” the investor said. “We were getting calls. A number of them were able to get money in the public market, frankly at terms that we wouldn’t have given them.”
Buffett and Abel added that none of Berkshire’s fully owned businesses have applied for government aid.
Buffett detailed the tough situation at See’s Candies, the Berkshire-owned chocolate maker that he’s described as his “dream business.”
“We were in the midst of our Easter season, and Easter is a big sales period for See’s,” he said. “See’s business stopped and it’s a very seasonal business to start with. We have a lot of Easter candy. Easter candy’s kind of specialized too, we won’t sell it.”
He also acknowledged that not all of Berkshire’s businesses will last, giving the example of Blue Chip Stamps, a trading stamps company that he invested in back in the 1970s.
Losing to the index
Buffett tackled the topic of Berkshire’s underperformance versus the S&P 500 in recent years.
“The truth is I recommend the S&P 500 to people,” he said. “Berkshire is about as sound as any single investment can be in terms of earning reasonable returns over time, but I would not want to bet my life on whether we beat the S&P 500 over the next 10 years.”
While Berkshire’s sheer scale makes it difficult to beat the broader market, Buffett said, it has some upsides.
“We’re better positioned than anyone in the energy business,” he said, citing the fact it doesn’t have to pay dividends. “We can do things in insurance that nobody else can do.”
“Ajit is one of a kind”
Buffett lauded Ajit Jain, Berkshire’s vice chairman of insurance operations.
He praised his intelligence, revealing that he wrote to Jain’s father a few years after he joined Berkshire to say, “If you’ve got another son like this, send him over from India, and we’ll rule the world.”
“It does not pay to drill”
Buffett weighed in on the plunge in oil prices in recent weeks. He defended his $10 billion investment in Occidental Petroleum, saying “it was attractive at oil prices that then prevailed.” Now, he continued, “it does not pay to drill.”
“Any shareholder in any oil-producing company, you join me in having made a mistake so far in where oil prices went,” Buffett added. “Who knows where they go in the future.”
If oil prices remain low, he continued, at least some energy companies are likely to default on their loans, hurting their shareholders and causing headaches for the banking industry.
“There’s going to be a whole lot of money [lost],” Buffett said.
Negative interest rates
Buffett considered the prospect of negative interest rates as central banks around the world cut rates to almost zero in order to stimulate their economies.
“Probably the most interesting question that I’ve seen in economics,” he said.
“We’re doing things that we don’t know [their] ultimate outcome,” Buffett continued, warning of “extreme consequences.”
The puzzle of what negative rates would do to US financial markets is “the most important question in the world,” he said in March. “And I don’t know the answer.”
Buffett doubled down on his defense of buybacks as an efficient way of distributing cash to shareholders. The practice is facing fresh criticism after the “big four” airlines repurchased billions’ worth of their stock in recent years, then clamored for government aid when they were caught short of cash by the coronavirus outbreak.
“It’s very politically correct to be against buybacks,” Buffett said. “There’s a lot of crazy things said on buybacks.”
While he’s witnessed some cases of “stupid” buybacks, they aren’t immoral, he added.
Buffett answered a question about why Berkshire didn’t repurchase more of its shares when they plunged in late March.
The investor seemed to suggest that Berkshire’s intrinsic value fell roughly in line with its stock price during the market meltdown.
“I don’t feel that it’s far more compelling to buy Berkshire shares now than I did three months or six months or a year ago,” Buffett said.
“Berkshire is worth less today because I took that position than if I hadn’t,” he said about its airline investments.
Buffett praised the Paycheck Protection Program, the government initiative to loan money to small businesses to help them weather the pandemic.
“It’s a very good idea to take care of the people that are having terrible trouble taking care of themselves,” Buffett said. He expected some amount of fraud, but gave “real credit” to Congress for acting promptly to help the millions of people left jobless by the outbreak.
Comedian Bill Murray submitted a similar question about how the country would reward the grocery-store cashiers, delivery drivers, warehouse workers, and others who will make up “a new class of war veterans.”
“It’s like people that landed in Normandy,” Buffett said. “The poor, the disadvantaged, there’s an unimaginable suffering. They’re working 24-hour days and we don’t even know their names.”
“We ought to do something that can help those people,” he added, referring more broadly to Americans struggling to make ends meet. “Nobody should be left behind.”