Buffett AGM Comments

[Nomad]

I just finished watching the Berkshire AGM livestream. My overall takeaway is that Buffett is very cautious, if not outright bearish, on the near-term prospects of the stock market. Some highlights below (mistakes and omissions are my own):

 

• WEB sees the US currently at "DEFCON 5" on the health impact of the coronavirus but only at "DEFCON 1" on the economic and market impact - seemed surprised by the disconnect
  
• Range of possible outcomes on the economic side is still "extraordinarily wide"
  
• Pointed out that the Dow fell from 381.17 on 1929-09-03 to 198.69 on 1929-11-13, but rose to 240.42 by 1930-08-29 - it was "not apparent" by the summer of 1930 that the US would enter the Great Depression
  
• Mentioned the lasting psychological impact of the Great Depression - two lost decades in stocks before the market went back to even in nominal terms
  
• WEB: "You can bet on America, but you have to be careful in how you bet."
  
• You will do fine if you buy an index and hold for "20 to 30 years"
  
• $6b in Berkshire net equity sales in April, all airline positions liquidated
  
• On overcapacity in airline industry - there are "too many planes"
  
• Unlike 2008, Berkshire has not acted as a lender of last resort because WEB "hasn't seen anything attractive"
  
• WEB: Companies were able to get money from the Fed in 2020 "on terms we wouldn't have given them"
  
• Sees possible permanent impairment in commercial real estate due to work from home programs
  
• Believes there could be "extreme consequences" from abnormally low or negative interest rates
  
• Did not buy back Berkshire stock because he did not see BRK at a discount to intrinsic value
  

 

Overall, some very interesting comments by Buffett and Greg Abel about the challenges currently facing the country and Berkshire's operating businesses as the pandemic persists.

 

[sleepydragon]

Feel Very bearish to me..

 

 

[DanielGMask]

I also think he is more bearish than usual. I’ll add that he stated that it’s a mistake to see the 125B in cash as 40% of funds, since even though we have 180B invested in public entities, there’s more invested in wholly owned businesses.

[clutch]

The depression story hit home for me. Maybe we won't get another big dip again, but the market could be stuck at around the current level for a prolonged period of time... 

[spartansaver]

It was my favorite annual meeting. I wasn't sure how much clarity he would give us into his thoughts, but I thought he shared the perfect amount. This is one of the most unusual times in our history, and this just adds to the list of people who describe this situation in a unique way. I found his heavy emphasis on the great depression very interesting. It seemed like a way of saying, "be extremely careful, buying this rise could be like buying right before the rise going into the depression." It had a very somber tone to the meeting, but was very illuminating on how well he can think through a range of possibilities. He's the GOAT, and I will forever be grateful for all of the wisdom he's shared. Always great seeing Whitney Tilson ;)

[Spekulatius]

I liked this annual meeting too Less frills, more substance.

 

I also noticed how long he dwelled on the Great Recession. And while he said, “Don’t bet against America, he didn’t bet on American stocks either. As always, watch what they do more so than what they say. In Buffets case it’s actually quite congruent.

[spartansaver]

That was much better than expected. He sounded well and sharp, questions were well selected, we even got one from Bill Murray.

 

I too heard a lot of bearish dog whistle. Especially that remark about him not wanting to talk about certain scenarios because he thinks he might increase the probability of them materializing if he does...

 

Meanwhile many of the media headlines are (predictably) upbeat:

 

- WSJ: Warren Buffett Says ‘American Magic’ to Overcome Virus Uncertainty

- CNBC: Buffett says economy will beat virus: ‘Nothing can basically stop America’

- USA Today: Buffett tells investors to 'Bet on America,' buying stocks for long-term gain

 

The market reaction to this should be fun to watch.

 

I skimmed that article after the meeting. I couldn't believe the spin it took on the meeting. The WSJ watched a very different meeting than the one I saw.

[Viking]

His comment about not understanding the impact of negative interest rates was also very clearly stated. He said understanding the impact of negative interest rates is likely THE most important economic question of our time. (The reason it is so important is we do not know).

 

He then punted the question to Greg who quickly agreed with Buffett.

[mattee2264]

Good summary Nomad. I think it was very significant that Buffett referred to the option value of money and it ties in which his earlier comment that there was still a very wide range of economic outcomes. My interpretation is he feels the option value of having cash has gone up significantly.

 

I think that is a very interesting way of thinking especially as most investors assume that cash has a static value and therefore whenever stocks decline 20% they assume that stocks have automatically become a lot more attractive relative to holding cash.

[Guest cherzeca]

as we know the greatest value inherent in an option is time (and the fixed exercise price...which is absent here...no one can be assured of using cash to buy a stock tomorrow at today's price).  I guess warren is waiting and not seeing value now.  but if he is right that people may have changed their behavior so much that airlines are not investable, then that is a more pessimistic take than I have, on what I think will blow over within a medium term (1-2 years) investment horizon.  maybe at age 90 warren is becoming more short term.

[DooDiligence]

I believe the ability to continue capital spending, and attracting talent, when earnings & cash flow are constrained, could be advantageous.

 

I'm thinking mainly about BHE, BNSF & the insurance operations.

This, of course, includes the other businesses that they don't simply let die on the vine.

 

You could argue that cheap credit will be available to those without a war chest but even if it's cheap, it's still a mill stone around your neck.

 

The analogy of BHE reinvesting cash that used to be paid out as dividends & widening their moat, comes to mind.

 

Could they get higher returns buying whole businesses or parts of businesses? Sure / maybe.

Anyone remember "Acres of Diamonds" by Earl Nightingale?

 

edit: www.nightingale.com/articles/acres-of-diamonds/

 

I know I'm just putting a positive spin on a subject with a ton of negative spin possibilities, but I'm definitely not putting lipstick on a pig.

[rranjan]

as we know the greatest value inherent in an option is time (and the fixed exercise price...which is absent here...no one can be assured of using cash to buy a stock tomorrow at today's price).  I guess warren is waiting and not seeing value now.  but if he is right that people may have changed their behavior so much that airlines are not investable, then that is a more pessimistic take than I have, on what I think will blow over within a medium term (1-2 years) investment horizon.  maybe at age 90 warren is becoming more short term.

 

How much intrinsic value will evaporate in those 2 years for shareholders? Yes, airlines may take on lots of debt and then keep paying those debts in the next 5-6 years. Just because they survive , will shareholders get richer? If yes, then by how much and what risk they are taking?

 

I don't think he is thinking short-term here. I think range of outcome is wide.

[Spekulatius]

as we know the greatest value inherent in an option is time (and the fixed exercise price...which is absent here...no one can be assured of using cash to buy a stock tomorrow at today's price).  I guess warren is waiting and not seeing value now.  but if he is right that people may have changed their behavior so much that airlines are not investable, then that is a more pessimistic take than I have, on what I think will blow over within a medium term (1-2 years) investment horizon.  maybe at age 90 warren is becoming more short term.

 

How much intrinsic value will evaporate in those 2 years for shareholders? Yes, airlines may take on lots of debt and then keep paying those debts in the next 5-6 years. Just because they survive , will shareholders get richer? If yes, then by how much and what risk they are taking?

 

I don't think he is thinking short-term here. I think range of outcome is wide.

 

It’s not a matter if air travel comes back. It surely will. It’s a matter of duration of the current and if current shareholders will get impaired and what the economics of the business will look like.

 

Buffet doesn’t know then answer and he realized that he didn’t get the deal that he thought he get when he bought into this. His process might have been correct and have worked out well in a parallel universe without the Coronavirus showing up, but it did not. So he makes the best guess and moves on. It is what it is.

[StevieV]

I thought that selling out of the airlines showed a lot of discipline that is difficult for most people, myself included.  I don't exactly why Buffett bought the airlines, but presumably he though the industry had rationalized so that there were a reasonable number of competitors acting rationally.  Air travel seemed like it was on a sustained upward growth and additional capacity was at least somewhat limited.  All of those things are no longer true.

 

Seems simple enough - all the reasons he wanted to own the airlines are no longer applicable, so he no longer wants to own them.  Straightforward, but not easy.

[DooDiligence]

I thought that selling out of the airlines showed a lot of discipline that is difficult for most people, myself included.  I don't exactly why Buffett bought the airlines, but presumably he though the industry had rationalized so that there were a reasonable number of competitors acting rationally.  Air travel seemed like it was on a sustained upward growth and additional capacity was at least somewhat limited.  All of those things are no longer true.

 

Seems simple enough - all the reasons he wanted to own the airlines are no longer applicable, so he no longer wants to own them.  Straightforward, but not easy.

 

I agree. He's not afraid to admit mistakes, although it must hurt especially so with airlines given his historical opinion on them.

[petec]

As a long-standing Fairfax watcher, all this talk of depression gives me deja-vu. I have learned my lesson and won’t listen to it this time, which almost guarantees that it will happen.

[Viking]

as we know the greatest value inherent in an option is time (and the fixed exercise price...which is absent here...no one can be assured of using cash to buy a stock tomorrow at today's price).  I guess warren is waiting and not seeing value now.  but if he is right that people may have changed their behavior so much that airlines are not investable, then that is a more pessimistic take than I have, on what I think will blow over within a medium term (1-2 years) investment horizon.  maybe at age 90 warren is becoming more short term.

 

How much intrinsic value will evaporate in those 2 years for shareholders? Yes, airlines may take on lots of debt and then keep paying those debts in the next 5-6 years. Just because they survive , will shareholders get richer? If yes, then by how much and what risk they are taking?

 

I don't think he is thinking short-term here. I think range of outcome is wide.

 

It’s not a matter if air travel comes back. It surely will. It’s a matter of duration of the current and if current shareholders will get impaired and what the economics of the business will look like.

 

Buffet doesn’t know then answer and he realized that he didn’t get the deal that he thought he get when he bought into this. His process might have been correct and have worked out well in a parallel universe without the Coronavirus showing up, but it did not. So he makes the best guess and moves on. It is what it is.

 

Listening to Buffett yesterday, I think the key reason he punted on the airlines is because they are such a capital intensive industry. And they are going to need a massive amount of new money just to survive the next year or two. And governments will want national champions (Italy nationalized it’s airline) so there will likely be lots of dumb things done there. So existing shareholders are at high risk of permanent loss of capital. Not an investment today but a speculation.

[Guest cherzeca]

I respect WEB greatly, so no quibbles on the airlines sale.  not sure he would do it if he had an OXY-like pref in them, but no matter...but why does he continue with the larger investment in Kraft Heinz if he sells loser airlines as a matter of discipline?  which you might recall he did not discuss in his last annual letter

[Viking]

As a long-standing Fairfax watcher, all this talk of depression gives me deja-vu. I have learned my lesson and won’t listen to it this time, which almost guarantees that it will happen.

 

The challenge with macro calls is you have to get not only the call right but also the timing. My view is the timing is the more difficult of the two to get right.

 

In time, we may learn that Fairfax was positioned properly in 2015 (with their very bearish position). They reversed in 2016 and locked in losses. Then got fully invested and may now be facing steep (paper) losses once again. If we get a severe bear market in stocks Fairfax may need to do a complete reset In terms of investment strategy to re-build investor confidence. What a crazy ride the past 25 years :-)

[rranjan]

I respect WEB greatly, so no quibbles on the airlines sale.  not sure he would do it if he had an OXY-like pref in them, but no matter...but why does he continue with the larger investment in Kraft Heinz if he sells loser airlines as a matter of discipline?  which you might recall he did not discuss in his last annual letter

 

One is drastically better business than other. Airlines are likely to use earning power to pay down debts  for the next 5-7 years. Airline was not a case of good business and overpaying.

[scorpioncapital]

Did anyone feel Greg Abel is not exactly as witty or eloquent as Warren Buffet? If he becomes CEO it may be a different vibe.

[vinod1]

I respect WEB greatly, so no quibbles on the airlines sale.  not sure he would do it if he had an OXY-like pref in them, but no matter...but why does he continue with the larger investment in Kraft Heinz if he sells loser airlines as a matter of discipline?  which you might recall he did not discuss in his last annual letter

 

He discussed this in his CNBC interview on Feb 25, 2019. It has a fantastic discussion on consumer goods industry. I am clipping a small part of his answer. He commented further in the same or a later interview, something to the effect that it would very difficult to exit without moving the prices.

 

BECKY QUICK: But if you see better places to deploy money, why don’t you sell?

 

WARREN BUFFETT: We-- well, A) we can’t as a practical matter move around tens of billions of dollars that easily. But beyond that I mean, if we’re working with a million dollars or $10 million, would I have a position in it? No. You can move around with a million or $10 million. And Ted and Todd can move around reasonably well with $13 billion. But that can be difficult. $173 billion, I mean, you dance like an elephant. Not like some guy on Dancing With the Stars.

 

Vinod

 

 

[Xerxes]

Folks, I am trying to understand this explanation.

 

he says CAPEX > depreciation … just means depressed earnings. How is that related to the net cash produced in the covid context remaining unchanged ? if anyone got that, a quick explanation would be appreciated.

 

thx

 

 

"Warren Buffett: (01:27:41)

It affects others much less. Our three major businesses of insurance and the BNSF railroad, railroad and our energy business, those are our three largest by some margin. They’re in a reasonably decent position. They will spend more than their depreciation. So some of the earnings will go, along with depreciation, will go toward increasing fixed assets.

Warren Buffett: (01:28:13)

But basically these businesses will produce cash even though their earnings decline somewhat. And if we’ll go to part two, at Berkshire, we keep ourselves in an extraordinary strong position. We’ll always do that—that’s just fundamental. We insure people. We’re a specialist to some extent and a leader. It’s not our main business, but we sell structured settlements. That means somebody gets in a terrible accident, usually an auto accident, and they’re going to require care for 10, 30, 50 years."

[StubbleJumper]

Did anyone feel Greg Abel is not exactly as witty or eloquent as Warren Buffet? If he becomes CEO it may be a different vibe.

 

 

Frankly, I'm good with that.  As long as the next guy does not fritter away the $100B+ cash balance on value-destructive, ego-driven acquisitions I won't much fuss about whether he is the funniest guy in the room.  I just pray that the next guy won't be another Edward Bronfman Jr.

 

 

SJ

[LC]

Folks, I am trying to understand this explanation.

 

he says CAPEX > depreciation … just means depressed earnings. How is that related to the net cash produced in the covid context remaining unchanged ? if anyone got that, a quick explanation would be appreciated.

 

thx

 

 

"Warren Buffett: (01:27:41)

It affects others much less. Our three major businesses of insurance and the BNSF railroad, railroad and our energy business, those are our three largest by some margin. They’re in a reasonably decent position. They will spend more than their depreciation. So some of the earnings will go, along with depreciation, will go toward increasing fixed assets.

Warren Buffett: (01:28:13)

But basically these businesses will produce cash even though their earnings decline somewhat. And if we’ll go to part two, at Berkshire, we keep ourselves in an extraordinary strong position. We’ll always do that—that’s just fundamental. We insure people. We’re a specialist to some extent and a leader. It’s not our main business, but we sell structured settlements. That means somebody gets in a terrible accident, usually an auto accident, and they’re going to require care for 10, 30, 50 years."

 

Greg Abel gives further context later in the meeting regarding BHE, towards the end, here is the entire context:

 

Greg, let me ask you one of these capital allocation questions. This one comes from [Matt Libel 00:03:16:53] and he says “Berkshire directed 46% of capital expenditure in 2019 to Berkshire Hathaway Energy. Can you walk us through with round numbers how you think differences in capex spending versus economic depreciation versus gap depreciation and help explain the timeframe over which we should recognize the contract of return on equity from these large investments, as we as shareholders are making in Berkshire Hathaway Energy?”

 

Greg Abel: (03:17:22)

So when we look at Berkshire Hathaway Energy and their capital programs, we try to really look at it as it was highlighted, really in a couple of different packages. One, what does it actually require to maintain the existing assets for the next 10 20 30 years i.e. it’s not incremental, it’s effectively maintaining the asset, the reflection of depreciation. And, our goal is always to clearly understand across our businesses, do we have businesses that require more than our depreciation or equal or less? And happy to say with the assets we have in place and how we’ve maintained the energy assets, we generally look at our depreciation as being more than adequate if we deploy it back into capital to maintain the asset. Now the unique thing in the lion’s share of our energy businesses that are regulated and that exceeds 85% of them, 83% of them, we still earn on that capital we deploy back into that business. So it’s not a traditional model where you’re putting it in, but you’re effectively putting it into maintain your existing earnings stream. So it’s not drastically different, but we do earn on that capital.

 

Greg Abel: (03:18:43)

But what we do spend a lot of time, and that’s what when Warren and I think about the substantial amounts of opportunities, that’s incremental capital that is truly needed within new opportunities. So it’s to build incremental wind, incremental transmission, that services the wind or other types of renewable, solar. That’s all incremental to the business and drives incremental both growth in the business. It does require capital, but it does drive growth within the energy business. So there’s really the two buckets. I think we would use a number a little bit lower than the depreciation. We’re comfortable the business can be maintained at that level and as we deploy amounts above that, we really do view that as quote incremental or growth CapEX.

 

Warren Buffett: (03:19:33)

Yeah, we have what, 40 billion or something? What do we have in sort of kind of in the works?

 

Greg Abel: (03:19:42)

So we have basically, as Warren’s highlighting 40 billion in the works of capital. That’s over the next effectively nine years, 10 year period, a little approximately half of that we would view as maintaining our assets. A little more than half of it’s truly incremental. And those are known projects we’re going to move forward with. And I would be happy to report, we probably have another thirty billion that aren’t far off of becoming real opportunities in that business.

 

Greg Abel: (03:20:16)

As Warren said, that it takes a lot of time. It’s a lot of work. The transmission projects, for example, we’re finishing in 2020, were initiated in 2008 when we bought Pacific Corp. I remember working on that transmission plan, putting it together, thinking “Six to eight years from now, we’ll, we’ll have them in operation.” 12 years later and over that period of time we earned on that capital, we have invested and then when it comes into service, we earn on the whole amount. So we’re very pleased with the opportunity, but we plant a lot of seeds, put it that way.

 

Warren Buffett: (03:20:48)

Yeah. And these are not, it’s not like they’re super high return thing, they’re decent returns over time. And we’re almost uniquely situated to deploy the capital. As opposed, you could have government entities do it too, but, but in terms of the private enterprise. And they take a long time, they earn decent returns. I’ve always said about the energy business, it’s not a way to get real rich, but it’s a way to stay real rich.

 

Warren Buffett: (03:21:23)

And we will deploy a lot of money at decent returns, not super returns. You shouldn’t earn super returns on that sort of thing. I mean, you are getting rights to do certain things that governmental authorities are authorizing and that they should protect consumers, but they also should protect people that put up the capital. And, it’s worked now for 20 years and it’s got a long runway ahead.