Albert Lee at the Berkshire Hathaway Shareholder Meeting
Omaha, Nebraska, USA
A cold, rainy morning on Saturday 30 April 2016 did not deter 40,000 shareholders from descending on a quiet mid-western town in the US to hear two of the best investment minds answer 54 questions over six hours. I am of course, speaking about Warren Buffett and Charlie Munger, the Chairman and Vice-Chairman of Berkshire Hathaway, a holding company that owns or partially owns such well-known companies as Coca-Cola and American Express.
Here is a summary of the day’s Q&A:
Commodities
Through his large railroad holding, Buffett confirmed that coal is in secular decline. Oil shipments will stay down for a while however he stopped short of saying whether oil prices are seen as cheap. Instead, in typical Buffett fashion, he admitted to not having the faintest idea on where the long term oil price will be.
Comment – With coal playing a large part of the Australian commodities landscape, we can infer that our coal sector is also struggling. Amongst companies that have exposure in this sector, other than the underlying coal producers, are mining services Aurizon and to a small extent, Wesfarmers.
Negative interest rates
The majority of insurers and banks do not have the same capital allocation flexibility as Berkshire Hathaway. Insurance companies will in general struggle to have much of an investment income in the medium term especially in Europe and Japan where they have negative interest rates.
Comment – Our insurers, and to a smaller extent our banks, are directly impacted by negative interest rates if they have money in those countries with negative rates such as Japan.
Where will interest rates go?
With rates in some parts of Europe and Japan turning negative (meaning that you pay to have your money in the bank), Buffett and Munger admitted that this is an interesting movie and one where no one knows the ending. Munger said even he and Warren are “confused” so if anyone believes they know how the story will end, they must be smarter than they are. Munger, however, said that is unlikely to be the case!
Comment – We are in unprecedented times and with such uncertainty, we can expect markets to display more random volatility in the future.
US Presidential race
Munger avoided questions regarding the current political situation, but said that if Trump is elected President, Berkshire will be the least of his problems. His company has thrived through many presidents, wars and crises. But both also cannot believe the current results, showing just how divided and disenchanted people are with politicians around the world.
Comment – This highlights just how important it is for investors to focus on the fundamentals and not to buy and sell based on predictions, or fear and greed.
Banking
There are only a small handful of banks that are worth investing in (no names mentioned) but they said 45 out of the 50 largest banks are un-investable. Higher capital requirements and tougher regulations in general, along with low or negative rates, does not bode well for their own growth prospects. Beware of investment banks that have continuously increased their use of derivatives.
Comment – Domestic investors have been treated to a wonderful 25 year streak and have become accustomed to seeing the banking sector as a defensive play that will provide high income as well as good total returns. With a tougher regulatory environment and higher capital requirement, we believe the returns from our banks over the next decade are unlikely to match that of the last 20 years due to slowing growth and a tougher economic landscape.
On macro-economics
The two men focus on allocating capital by finding strong businesses rather than forecasting where they think rates, politics and what the world will be 5-10 years from now. However, due to the low rates, they have had to pay a little more for businesses in general compared to 10 years ago because interest rates are an important factor in valuing a business.
Comment – Interest rates are one of the most important components in the valuation equation. While low rates often mean that the value of assets rise, we also need to be cautious in extrapolating this far into the future. We do expect that several years from now rates could be a little higher than where we are now.
On finding value
Berkshire has bought more capital intensive businesses recently compared to the simple, consumer driven, strong moat-like businesses like Coca-Cola. However, the past few years have seen very little by way of decent valuation and prospects in businesses that are more consumer driven.
Comment – We are also seeing investors gravitate towards these high quality, low capital intensity businesses (such as REA and CSL) in Australia. As such, we are still struggling to find a lot of value in the overall market in the high quality end. Investing elsewhere means investors must take on the higher risks.
Summary
With Berkshire Hathaway’s book value now comprising 75% wholly owned subsidiaries, the stock portfolio has taken a back seat. However, the diversity of their holdings also means that Berkshire has become something of a bellwether for the economy and through their activities, investors can be guided on the current economic landscape.
Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. June 2016
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