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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Take aways from Berkshire Hathaway’s 2023 shareholder meeting

“What gives you opportunities is other people doing dumb things ... In the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number people doing dumb things, and they do big, dumb things.” – Warren Buffett, Berkshire Hathaway annual meeting 2023

 

On Saturday, Berkshire Hathaway (BRK-A and BRK-B) held their annual shareholder meeting in Omaha hosted by Chairman Warren Buffett and Vice Chairmen Munger, Abel and Jain. Just before the meeting started, the company also released their 1Q23 earnings. An estimated 40,000 people attend the annual meeting, which is often referred to as the ‘Woodstock For Capitalists”. The meeting – as usual – was chock-full of insights from a couple of investors that have been “around the block” a time or two. Although I was not there in person this time, I have been to a Berkshire Hathaway annual meeting before, and it was an enlightening experience.


During this year’s meeting, the media / investor Q&A lasted around five hours, quite remarkable in itself given that Mr Buffett is 92 years old and Mr Munger is 99. Mr Buffett and team promised to take 60 questions from journalists and investors, which he did over a nearly five hour period (with lunch in-between). I managed to take in the (US) morning session, which was full of the sorts of comments and thoughts you might expect from a couple of legendary investors with many years of experience. If you have the patience, you can watch the morning shareholders meeting and Q&A session here, and the afternoon Q&A session here. If you don’t have five hours to spare, then CNBC has a nice summary here(text and 7 min video link). And CNBC also has video snippets with headers (here), so you can watch the parts that interest you.


Take-aways / “words of wisdom”

There were so many interesting soundbites that is it impossible to capture them all, but here are a few that resonated with me:

  • The fact that the FDIC stepped in to seize SVB and guarantee depositors saved the banking system from a total meltdown,

  • Doesn’t expect the US Dollar to lose its reserve currency status anytime soon (no alternative yet that is viable),

  • Can’t understand why China and USA aren’t more cooperative because it would make both countries stronger,

  • Both have doubts about AI, less about the value of the technology and more about the speed and scope of its adoption (and especially the hype around AI); big believer in robotics,

  • Commercial real estate could be in for some pain reiterating what Mr Munger had said in an interview a few days ago,

  • There are too many wealth managers; Mr Buffett still likes and recommends low-cost index funds,

  • US debt ceiling will probably get resolved but does investors no favours, US government default would push world into turmoil,

  • They commented on a few specific names of portfolio companies that have been in the news, including Occidental Petroleum, Activision Blizzard, Apple and TSMC, as well as about US banks (since they own shares in US financial institutions including Bank of America), and

  • Mr Buffett reminded investors that his successor would be current Vice Chairman Greg Abel, who is in charge of the company’s non-insurance operations and has been with Berkshire Hathaway since 2000. (First disclosed at / just after 2021 shareholders’ meeting.)

Earnings / financial matters for 1Q23

Berkshire released 1Q23 results just before the annual meeting on Saturday. As a holder of minority stakes in over 50 public-listed companies (see information table from 13F here) and economic tailwinds during the first three month of the year, Berkshire’s business performed nicely in 1Q23 although the share price largely moved sideways.

  • Mr Buffett likes to rightly focus investors more on the trend in Berkshire’s operating profit than on bottom-line results. The reason is that the company’s consolidated operating profit includes the results of the companies that Berkshire controls – like insurance, railroads and energy, among others – and excludes the gyrations in stock prices of companies in which Berkshire is a non-controlling minority investor. As you might imagine, the bottom-line results of Berkshire can gyrate sharply from quarter-to-quarter based on the general direction of the stock market.

  • 1Q23 operating profit from core businesses was $8.1 bln, vs $7.2 bln in 1Q22 (+12.6%), and bottom line (including mark-to-market for minority holdings) was $35.5 bln, vs $5.6 bln.

  • Cash increased to $130.6 bln at the end of 1Q23, slightly higher than at year-end.

  • Stock buybacks continued with $4.4 billion of stock repurchased in 1Q23. To benchmark this, the company bought back $27 bn in 2021 (pandemic and BRK stock “cheap”) and $8 bln in 2022 (market selling off, cash used to invest in other companies and make acquisitions). The company has had a buyback programme since 2011. (Read about Buffett’s comments on taxing stock buybacks in EMC here.)

  • Looking forward, Mr Buffett expects further economic turbulence and headwinds, and therefore is telling investors to remain cautious about BRK performance in the quarters ahead.

Also interesting of course is the company’s annual report to shareholders, especially the much-read letter to shareholders penned by Mr Buffett. You can find the 2022 annual report here, and the 1Q23 more sterile 10-Q released just before the annual meeting on Saturday here.


Is this a stock I should own?

The disclosure I must provide before I answer this question is that Berkshire Hathaway is my largest single holding. So should you consider this stock if you don’t already own it? That’s up to you of course. Certainly, the company has a unique profile. It does not pay a dividend, and I have always viewed it as more of a value play than a growth / momentum play. When tech is flying, Berkshire’s stock underperforms, but when investor rationality brings down multiples, Berkshire shares perform relatively well (or at least that has been my assessment). That being said, the stock has had an amazing ride over many decades. According to calculations in the company’s 2022 annual report (see p. 2), the stock has returned 3,878,464% since 1964 (CAGR of 19.8%) vs 24,708% for the S&P 500 with dividends reinvested (CAGR of 9.9%). Here’s a graph of the performance of the shares since the early 1980s from YahooFinance.com:

Berkshire offers two classes of shares: the core A shares (BRK-A) that have never been – and never will be (according to Mr Buffet) – split, and the B shares (BRK-B) which represent 1/1,500 of the value of the A shares. (As an aside, should you own a share or two of BRK-A, they can be converted to smaller-denomination and more easily tradeable BRK-B shares at 1,500 Bs to 1 A.) The B shares have split (in 2010) and are more readily and easily available to retail investors. The B shares have slightly less voting rights. For reference, the A shares closed on Friday at $491,840/sh, and the B shares closed at $323.88/sh. This article in Investopedia provides a nice summary of the two classes of stock.


Other things to be aware of:

  • As I mentioned above, Berkshire Hathaway does not pay dividend; the company instead relies solely on share buybacks to return money to shareholders.

  • The company is a mix of operating businesses and investments in publicly-listed companies including Apple (AAPL), Bank of America (BAC), Chevron (CVX), Coca-Cola (KO) and American Express (AXP). Berkshire owns 5.66% of AAPL FYI.

  • The mix of operating and investment businesses and mark-to-market GAAP requirements leads to sharp volatility in bottom-line results from period to period, so the company encourages investors to focus on operating profit trends (which exclude the mark-to-market changes on minority stakes in public companies).

  • The company is included in the Financial Select Sector Index, and the Financial Select Sector SPDR ETF (XLE). BRK-B is the largest holding in the index and the fund (13.27% as of May 4).

  • Berkshire’s “reputation” is that they are an old company with overly traditional ideas, but if you study them more, you will find out that Messrs Buffett and Munger are very much in touch with what is going on in the world and the trends that matter today. They quite rightly remain sceptical of “salesy” investment bankers, as well as “trendy” drivers of market performance that have little substance or no staying power.

I am not sure how the shares will perform as we open the week. On one hand, Berkshire Hathaway’s 1Q23 earnings were outstanding as the stars were aligned across markets and the US economy. On the other hand as Mr Buffett said at the annual meeting, the company will face more severe headwinds in the quarters ahead. Whether the 1Q23 earnings will drive the stock price this week or the rather dour outlook is hard to say, since Berkshire is not the only company to deliver strong 1Q23 results but warn of headwinds. The bottom line is that Berkshire Hathaway is a great name to hold long-term as a core position, although this is just my opinion (and is not investment advice, etc).


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