Lessons from Berkshire’s AGM | Fin24
 
Loading...

Lessons from Berkshire’s AGM

May 14 2020 09:28
Simon Brown

On the first Saturday of May each year Berkshire Hathaway hosts its annual general meeting (AGM). This is no ordinary AGM as over 40 000 shareholders make the trek to Omaha, Nebraska where Berkshire has its head office and Warren Buffett his home.

In past years, the AGM was a festive event with Berkshire companies selling their products followed by over eight hours of questions from the media and shareholders. But lockdown changed everything as the event became virtual and Charlie Munger was unable to travel, so it was just Warren Buffett and Greg Abel fielding questions.

Abel is the chairman and CEO of Berkshire Hathaway Energy and vice chairman of non- insurance operations of Berkshire Hathaway. He is also the possible successor to Buffett at Berkshire.

A video of the AGM is available online on Yahoo! Finance, but here are my highlights of the event. To begin with, Buffett sold all his airline stocks and that left me with two thoughts.

Firstly, I was surprised when he bought them as he’s long been very sceptical of the industry. However, he got sucked in a few years ago and ultimately did make a profit but really as a trade rather than a long-term investment.

Secondly, when he decided to exit the industry, he did so wholesale. There was no piecemeal selling. Contrary to this approach is an error many investors, including me, make. We sell a part, even a large part, of an investment we want to exit. This shows a lack of conviction on our part.

We want out but we’re worried the stock will run, so we hold some shares, essentially to cover all our bases. But long-term investing in individual stocks is about conviction. Either hold or sell, don’t make half a decision and end up doing neither.

Another great point was that Berkshire is no longer a get-rich company. It is now a stay-rich company. With billions in profit every year and about $137bn in cash the business is now about protecting its wealth rather than the earlier days when it was about growing the wealth.

As individuals we'll hopefully have the same transition at some point, and we need to notice it and adapt accordingly. When you have created the wealth, the strategy changes. It's not about playing it safe, rather about managing larger positions. It entails a shift in focus from only capital appreciation to also spending the cash flow that comes from dividends.

Another interesting point is that while the Berkshire share price is under pressure, the company is not buying back its shares with the gusto one would expect, considering the discount at which it’s trading to its intrinsic value. This is the usual metric used by the company to decide at which price it will buy back shares.

Buffett said Berkshire didn’t want to buy back shares as the sellers of those shares would be current shareholders who won’t have all the relevant information as to the actual value of Berkshire. This is an important point. As a buyer or seller in the market right now we simply do not have all the important information and as such should be extra cautious.

I have been managing this extra risk by only buying exchange-traded funds (ETFs) and waiting for company results later in the year to help guide me as to which shares offer opportunity.

Lastly, while Berkshire normally keeps a massive $20bn in cash as a buffer for unforeseen events, Buffett said that they would be keeping a higher level. This notwithstanding that they currently have six times that amount of cash.

Buffett’s reason was simple: The Covid-19 pandemic is unprecedented and as such nothing we’ve seen before can prepare us for how the pandemic will play out. So, to be extra cautious is a far better response and hence keeping a larger emergency fund makes perfect sense.

This article originally appeared in the 21 May edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

NEXT ON FIN24X

 
 
 
 
4 June issue
Subscribe to finweek
Loading...