Tuesday, October 2, 2018

Berkshire 2018 Meeting Highlights - Part II

From the Berkshire Hathaway (BRKa) shareholder meeting earlier this year:

Warren Buffett: "...I have here a New York Times of March 12th, 1942. I'm a little behind on my reading. (Laughter)

And if you go back to that time, that — it was about, what? Just about three months since we got involved in a war which we were losing at that point.

The newspaper headlines were filled with bad news from the Pacific...I'd like you to imagine that at that time you had invested $10,000. And you put that money in an index fund — we didn't have index funds then — but you, in effect, bought the S&P 500...[or]...Let's say you'd taken that $10,000 and you'd listened to the prophets of doom and gloom around you, and you'll get that constantly throughout your life. And instead, you'd used the $10,000 to buy gold.

Now for your $10,000 you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants, and new inventions came along, you would go down every year in your — look in your safe deposit box — and you'd have your 300 ounces of gold.

And you could look at it, and you could fondle it, and you could — I mean, whatever you wanted to do with it. (Laughter)

But it didn't produce anything. It was never going to produce anything...So if you decided to go with a nonproductive asset — gold — instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock — whatever it might be — you would now have over 100 times the value of what you would have had with a nonproductive asset.

In other words, for every dollar you had made in American business, you'd have less than a penny by — of gain — by buying in this store of value, which people tell you to run to every time you get scared by the headlines or something of the sort."

Later in the meeting, Warren Buffett and Charlie Munger had this to say about long-term bonds relative to productive assets:

Warren Buffett: "...the one thing we know is we think that long-term bonds are a terrible investment, and we — at current rates or anything close to current rates...it's almost ridiculous when you think about it. Because here the Federal Reserve Board is telling you we want 2 percent a year inflation. And the very long bond is not much more than 3 percent. And of course, if you're an individual, then you pay tax on it. You're going to have some income taxes to pay.

And let's say it brings your after-tax return down to 2 1/2 percent. So the Federal Reserve is telling you that they're going to do whatever's in their power to make sure that you don't get more than a half a percent a year of inflation-adjusted income...I think I would stick with productive businesses, or productive — certain other productive assets — by far.

But what the bond market does in the next year, you know — you’ve got trillions of dollars in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing. And we do not bring anything to that game that would allow us to think that we’ve got an edge.


Charlie Munger: "Well, it really wasn't fair for our monetary authorities to reduce the savings rates, paid mostly to our old people with savings accounts, as much as they did. But they probably had to do it to fight the Great Recession, appropriately.

But it clearly wasn't fair. And the conditions were weird. In my whole lifetime, it's only happened once that interest rates went down so low and stayed low for a long time.

And it was quite unfair to a lot of people. And it benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stock. So we're all a bunch of undeserving people — (laughter) — and I hope that we continue to be so."

Some might have a difficult time internalizing the fact that owning a piece of a public company should be viewed as similar to the ownership of productive assets that generally aren't traded publicly (e.g. 100% private ownership of a restaurant, small factory, or farm). The second by second quotations during market hours, at least in part, have a tendency to distract the partial owner from the bigger picture.

It shouldn't but often does.

So they end up buying/selling too much.

What should be advantage -- the ability to conveniently deploy and free up capital -- becomes disadvantage.

Getting beyond this is just one small step -- but an important one.

There are practical differences and considerations, of course. Naturally, owning a very small part of a business means you can't much influence the direction of the company (whether excess capital should be distributed or allocated, new market opportunities, location considerations, competitive threats, technology shifts, etc.). So a quality board and management team will usually matter enormously. 

Yet, otherwise, Buffett has on prior occasions made the point that a stock ownership of a publicly-traded company should be thought of the same way as the sole ownership of something like a rental property or a business.

How much cash (compared to understood alternatives) that a productive asset likely produces over the very long haul relative to the cash to be invested -- whether or not publicly traded, whether or not owned outright -- is what ultimately matters.

No such consideration is necessary for the nonproductive asset.

It produces nothing and never will.


Long position in BRKb established at much lower than recent market prices

Related post:
Buffett: Berkshire 2018 Meeting Highlights - Part I
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