If you are in any way interested in investing, finance and/or learning, it is very likely that, like us, you tuned in to see what Warren Buffett and Greg Abel had to say in the broadcasted Berkshire Hathaway’s Annual Meeting. Despite missing a lot of the essence due to the meeting being remote and without the presence of Charlie Munger, we found Buffett’s message fresh, although tainted with caution. He also gave attendees some timeless principles which we highlight below.
Before going into the details, we would like to congratulate Rev on the excellent and timely work on having a transcript available so promptly, and obviously to Yahoo! Finance on a seamless transmission. Please find the link to the transcript here and the link to the whole meeting below.
Berkshire’s 1Q20 was marked by a precautionary stance: the company was a net seller of stocks, kept the cash pile up and halted repurchases in late February-early May, based on the average price of $214 reported. Buffett spent a great deal of time explaining certain base rates for Berkshire’s precautionary stance. (We also wrote about the key takeaways from Ray Dalio’s Debt Crises studies here, which also provides great insights on how things could play out) We highlight the following:
The comparison with the Great Depression of 1929 in terms of performance: Buffett spent some time comparing how after a period of bonanza, the DJIA was down by 83% in two years from the peak in September 3, 1929. Buffett mentioned “People did not think in the fall of 1930 they were in a great depression… they thought it was a recession.”
He also dwelled on the psychological effects of the depression and how long it took to recover: “So the Great Depression went on, and it lasted a very long time, but it lasted a lot longer in the minds of people that it did actually in its effects.”
“So take the years from 1920, 1930 or 1929 into the 1951, that was flat out a time of for a long time with no economic growth, and no feeling by people in terms about the wealth of the country, about what the American economy was worth, about all these corporations that were doing far, far, better than they were, all in all, but it took all of that time to restore in the market a price level that was equal to what it was 20 years earlier.“
Moreover, he discussed that we do not know how the current environment will play out: “If you think about the fact that we’re enduring a few months, and we’ll endure some many more months, and we don’t know how it comes out, and people in the 30’s didn’t know how it was going to come out, but they endured, persevered, prospered, and the American miracle continued.”
“And we’re doing a lot of smart things and we’ve got a lot of very smart people, but there are unknowns. And the unknowns that apply to the health aspect create unknowns in the economy. And we’ll have to keep evaluating things as we go along. I hope, like crazy obviously, that once suppressed that it doesn’t come back and that we readjust. But things don’t always work perfectly. That doesn’t mean there was a better course of action that would not… I would not go around criticizing people at all for what they’ve done or anything of the sort. I just think you’re dealing with a huge unknown. And I think that the degree to which it’s disturbed the world and changed habits and endangered businesses in the last couple of months indicates that you better, not be too sure of yourself about what it’ll do in the next six months or year or whatever.”
As usual, he discussed avoiding the probability of ruin: “You learned that you can have any series of numbers times zero, and you just need one zero in there and the answer is zero, and there’s no reason to use borrowed money to participate in the American tailwind, but there’s every other reason to participate.”
Keeping in mind the 20+ years it took for the DJIA to recover in terms of level, he made the following remark: “You know, at least in my view, you know that America’s tailwind is not exhausted. You’re going to get a fine result if you own equities over a long period of time… They’re going to outperform Treasury bills. They’re going to outperform that money you’ve stuck under your mattress. I mean, they are a enormously sound investment as long as they’re an investment and they’re not a gambling device or something that you think you can safely buy on margin or whatever it may be.“
More importantly, he closed his remarks on American equities with the following: “And with that, I hope I’ve convinced you to bet on America. Not saying that this is the right time to buy stocks if you mean by “right,” that they’re going to go up instead of down. I don’t know where they’re going to go in the next day, or week, or month, or year. But I hope I know enough to know, well, I think I can buy a cross section and do fine over 20 or 30 years. And you may think that’s kind of, for a guy, 89, that that’s kind of an optimistic viewpoint. But I hope that really everybody would buy stocks with the idea that they’re buying partnerships in businesses and they wouldn’t look at them as chips to move around, up or down.”
He discussed that he does not know the consequences of the shutdown, and the likelihood that there are mistakes along the way: “But what we do know is that for some period, certainly during the balance of the year, but it could go on a considerable period of time, who knows, but our operating earnings will be less, considerably less than if the virus hadn’t come along. I mean, that’s just it. It hurts some of our businesses a lot. I mean, you shut down. Some of our businesses effectively have been shut down.”
On why the cash positions may seem large but could be deceiving: “But we have hundreds of billions of wholly owned businesses. So our $124 billion is not some 40% or so cash positions, it’s far less than that. And we will always keep plenty of cash on hand, and for any circumstances, with a 9/11 comes along, if the stock market is closed, as it was in World War I—it’s not going to be, but I didn’t think we were going to be having a pandemic when I watched that Creighton-Villanova game in January either.”
We highlight Buffett’s discipline and constant evaluation of situations, something that is extremely hard to do due to loss aversion and consistency bias. He exited the airlines, as the landscape changed: “The airline business, and I may be wrong and I hope I’m wrong, but I think it changed in a very major way, and it’s obviously changed in the fact that there’re four companies are each going to borrow perhaps an average of at least 10 or 12 billion each.”
We close with what we believe circles very well the job of an independent, savvy investor and how we should approach the times we face:
“But if you’re going to look at the price of the stock and think that you have to act because it’s doing this or that, or somebody else tells you, “How can you stay with that,” when something else is going up or anything. You’ve got to be in the right psychological position. And frankly, some people are not really careful. Some people are more subject to fear than others. It’s like the virus. It strikes some people with a much greater ferocity than others. And fear is something I really never felt financially, but I don’t think Charlie’s felt it either. But some people can handle it psychologically. If they can’t handle it psychologically, then you really shouldn’t own stocks, because you’re going to buy and sell them at the wrong time. And you should not count on somebody else telling you this. You should do something you understand yourself. If you don’t understand it yourself, you’re going to be affected by the next person you talk to. And so you should be in a position to hold, and I don’t know whether today is a great day to buy stocks. I know it will work out over 20 or 30 years. I don’t know whether it’ll work out over two years at all. I have no idea whether you’ll be ahead or behind on a stock you buy on Monday morning, or the market.”
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