Greetings from Omaha! Yes, we know that today is Fed Day, and we are all back in the Fort in the Monarch office today. As expected, the Fed raised its Fed Funds target rate by 0.50% (50 basis points) this afternoon. Commensurately, the Fed will also shrink its massive balance sheet by not reinvesting the proceeds of matured bonds. The stock and bond markets seem to be taking the announcements very well, as they have been well-telegraphed for quite some time. “New” information is likely to come when the minutes of the Fed meeting are released. This will feature the “dot plot,” which shows the estimate of each Fed governor for Fed Funds rates by the end of 2022, 2023, etc.
The market’s main concern over the past few months seems to vacillate between the Fed raising rates too quickly and inflation being too out-of-control for the Fed to corral it. While we are concerned that inflation might remain crazy for some time (labor market, semiconductors, housing, natural gas), companies are managing through it admirably. Unbelievably, earnings estimates for 2022 have actually risen since the year began, in spite of the myriad headwinds to profits. This is not normal; in 70-80% of years, estimates fall throughout the year. Even as profits grow in most years, they grow less than overly ambitious analysts expected.
And yet the S&P 500 is down 12% so far this year, with other indices down more. Valuations have corrected sharply, mostly in expensive growth stocks, because interest rates have shot up so much, so quickly. The Barclays Agg Index, which best represents the investment-grade bond market (no junk bonds), has lost 10% this year. Suddenly, bonds are yielding more than stocks, which has dampened a major support for stocks. We are comforted at least with the payoff from owning higher-quality stocks and bonds.
Hoping to figure out where the markets are headed, George, Adam and John set off for Omaha to attend Berkshire Hathaway’s annual meeting last weekend. It was the first “Woodstock for Capitalists” in-person meeting since 2019, with attendance north of 20,000 shareholders. George was our tour guide, having attended numerous meetings in the past, while John and Adam were rookies. George did not disappoint; the “Warren and Charlie Show” did not disappoint; the spectacle of it all was unforgettable. Note to self (and any other travelers): don’t assume that Uber fares will always be reasonable, although chatting up the drivers more than made up for it.
For those unfamiliar with this annual shindig, it is technically an annual shareholders’ meeting, as all publicly-traded companies are required to host. Shareholders vote for (or against) directors, the company’s auditors, compensation arrangements, and any shareholder activist measures that make their way onto the ballot. Remember that you, as a shareholder, have an option to cast your own proxy votes, or let us do it for you. The business part of the meeting (tabulating and announcing the votes) didn’t start until 3:45pm, and is an afterthought for most shareholders in attendance. Warren Buffett is chairman of Berkshire, as he has been since 1970, and Charlie Munger is vice chairman, since 1978.
The “meeting” started at 8:30am with a 45 minute “movie,” which is a montage of many skits made just for the event, sandwiched around commercials for companies owned by Berkshire. Many of those commercials have been on-air already, but some were made for the meeting. No one is allowed to record the movie, and you won’t find the movie anywhere online, even on YouTube.
Among the highlights of the movie was a hilarious Groundhog Day take on the annual meeting not taking place during the last 2 years, with Warren trying to break into the arena and Bill Murray as a security enforcer not letting him. Other cameos included Desperate Housewives actresses fawning over Charlie, Charlie threatening Rainn Wilson (as Dwight) from The Office, and inserting himself into a Breaking Bad scene with Bryan Cranston. Pete Davidson is getting his tattoos removed in an ad for SmartWater (owned by Coke, a major Berkshire holding). George and Adam had to restrain John from trying to jump into the big screen during a 2 minute Brooks commercial featuring runners running on all sorts of gorgeous trails. A Geico ad featured an auctioneer ordering breakfast for his family in 15 seconds or less. Even before the movie began, a version of “Empire State of Mind” by Jay-Z and Alicia Keys played, with lyrics dedicated to Berkshire. We mention these not to imply that these are TV shows we watch or artists we typically listen to, but to showcase the spectacle of it all. Jamie Dimon, Tim Cook, and Bill Gates were in attendance. Adam chatted up an Aussie bloke who manages his own family office and was headed next to Louisville to watch his horse race in the Derby.
After the movie, the crowd warmly greeted Warren and Charlie, who were joined on stage by Greg Abel (appointed successor to Warren) and Ajit Jain (who runs Berkshire’s insurance operations). Ajit was once considered a possible successor to Warren, given how successful he has been in the job, but that was when he was younger; now he is 71! Warren is 91 and Charlie is 98, by the way.
Warren and Charlie proceeded to then basically answer questions for 6 hours, with a 1 hour lunch break in the middle. Let’s be honest and state upfront that they are not immune to Father Time; their speaking manner is slower and not as smooth, but it is clear that their minds are still nearly as sharp as ever. Their answers were laden with wisdom, an immaculate recall of information on the fly, and great stories, which is what people love to hear from the two sages. I don’t know if any of us could handle a nonstop barrage of left-field questions for 6 hours and still end up sounding intelligent. Some of their recent deals remind us that they are not afraid to make bold investing decisions. When they aren’t actively deploying billions of dollars into an investment, it doesn’t mean they are lazy or senile; it simply means they are waiting for better opportunities.
One of the highlights was their discourse on the stock market in the pandemic era. Warren called it a big gambling parlor: “The market in the last couple years has been extraordinary, sometimes efficient and other times almost totally a casino… Wall Street makes a lot more money when people are gambling than when they are investing.” Charlie added: “We now have computer algorithms trading with other computers. And people buying stocks who know nothing, being advised by people who know even less. It’s an incredibly crazy situation.” But, “all this activity makes it easier for us” to find opportunities to buy, as they have done this year as stocks have gotten cheaper. On market timing, they said “I don’t think we have ever made a decision where either one of us were thinking about what the market is going to do. Or for that matter, on what the economy is going to do. We just don’t know.” Warren lamented a lack of activity during the 5-week pandemic lockdown bear market in 2020, saying that even Ted Williams batted only .406 in the best year of his storied career.
The two had nothing good to say about cryptocurrencies, a subject we are also frequently asked about. I’m not sure we’ve ever had anything intelligent to say, other than to point out that their prices seem to rise and fall simultaneous to recent IPOs, SPACs, and meme stocks. If you don’t know what those are, we’d be happy to tell you. Let’s just say the last 6 months have not been kind to any of these. Warren says he prefers “productive assets” that generate income, rather than having their value be dependent upon only what the next person will pay for them. Charlie went a step further in declaring that he tries to “avoid investments that are: 1) evil, 2) stupid, and 3) have the potential to make me look bad relative to someone else. Bitcoin is all three.”
Asked about inflation, the two acknowledged that none of us know how long it will keep running this hot. But they did offer this advice as to how folks can best cope with inflation: invest in yourself. Be the best at what you do in your line of work, so that you can ensure that your income will grow faster than prices. And “you should be a better person in the second half of your life than the first. Why? You have more life experience.”
Share buybacks are a gift. Berkshire hasn’t bought any shares of American Express since the 20th century, but its stake in the company has risen from 11% to 20% since then.
The quip that brought down the house was when they were asked how they account for the possibility of a nuclear war. After Ajit worked his way through a thoughtful, methodical response, Charlie added, “I’m going to crawl under the table and kiss my a** goodbye.” Warren retorted: “Charlie is in charge of our risk control.”
The cult of Berkshire was alive and well in the Expo center, where Berkshire-owned companies tout their products. We toured a Forest River RV (list price: $450,000)…kudos to Elkhart. Forest River is also developing a $200,000 Margaritaville-themed pontoon boat, in partnership with Warren’s namesake, Jimmy. This was unveiled at the meeting; 15 attendees put money down to buy one, even though they won’t be built until 2023. We walked through a Clayton modular home (very snappy), raced cars virtually at Lubrizol’s exhibit, watched a model Burlington Northern train, marveled at the vast Pampered Chef store, tried to cajole George into shopping at Oriental Trading, and actually shopped at See’s Candies. Even the industrial businesses had interesting displays. It’s easy to see how being a Berkshire shareholder can become something approaching a cult, because you feel like you’re part of all these businesses.
The picture, by the way, was at Gorat’s Steakhouse, a favorite hangout for Warren, and George. It did not disappoint either.